What is the best way to get out of a recession?

What is the best way to get out of a recession?

• A. Decrease taxes and increase spending
• B. Increase taxes and decrease spending
• C. Cut both taxes and spending
• D. Do nothing and wait

Answer: (A)

When a recession hits, demand in the economy has fallen and businesses cut back or delay investments. The best way to counter that slump is expansionary fiscal policy: lower taxes and increase government spending. Lower taxes give households more disposable income, which tends to lift consumer spending, while higher government spending directly injects demand into the economy through projects, hiring, and services. Both moves raise aggregate demand, helping output and employment recover more quickly. The idea is to use the fiscal multipliers—each dollar of tax relief or government spending can spur more than a dollar in economic activity—to close the gap between actual GDP and what the economy can sustainably produce. Increasing taxes and cutting spending would reduce demand, making the downturn deeper. Cutting both taxes and spending can have mixed effects depending on the relative sizes and timing; it’s not as reliably stimulative as the expansionary approach. Doing nothing and waiting does nothing to counter the shortfall in demand, so the recession is likely to persist longer.

When a recession hits, demand in the economy has fallen and businesses cut back or delay investments. The best way to counter that slump is expansionary fiscal policy: lower taxes and increase government spending. Lower taxes give households more disposable income, which tends to lift consumer spending, while higher government spending directly injects demand into the economy through projects, hiring, and services. Both moves raise aggregate demand, helping output and employment recover more quickly. The idea is to use the fiscal multipliers—each dollar of tax relief or government spending can spur more than a dollar in economic activity—to close the gap between actual GDP and what the economy can sustainably produce.

Increasing taxes and cutting spending would reduce demand, making the downturn deeper. Cutting both taxes and spending can have mixed effects depending on the relative sizes and timing; it’s not as reliably stimulative as the expansionary approach. Doing nothing and waiting does nothing to counter the shortfall in demand, so the recession is likely to persist longer.