Aggregate Demand and Fiscal Policy in Recessionary Times
2020 was a difficult year, and the economy was technically in a recession.
However, the economy has been recovering from this recession due to the
timely and effective fiscal stimulus measures adopted by the government.
A. Use the AD (Aggregate Demand) model to show the impact of the
decline in consumption and investment on the economy in 2020. Show
how the fiscal stimulus measures that the government adopted, helped
the economy to stabilise in 2021. On the same diagram, illustrate and
explain the process of the multiplier.
B. Now assume hypothetically, if the government would have cut the
government spending to reduce the levels of debt and to improve their
budget balance in 2021. Comment on what would be the possible
implications of such an early withdrawal of support in the economy. (No
diagram required for this question).