Question

If the economy is experiencing a recession, list one fiscal policy and one monetary policy that can be used to correct the situation and explain the impact of each?

Answer 1

In case of a recession, an example of a fiscal policy would be Expansionary Fiscal Policy, which consist of tax cutting and/or increased government spending. The tax cut should incentivize people's spending, and thus leading to an increase in AD (Aggregate Demand, the total demand for services and goods) which would also boost GDP (Gross domestic product, the nation's market value of all final goods and services in a given year).

A good monetary policy would be Expansionary monetary policy. This policy relies on the cutting of interest rates to boost AD.

Fiscal and monetary policies are often behind the same results and work with one another to achieve them. The difference lies in this: fiscal policies have to do with taxation and government spending, while monetary policies are related to interest rates.