Jan 31 2008
Alice Su, an AP Econ student, asked a very good question in class today during our discussion of the business cycle, which illustrates the tendency of national economies to fluctuate between periods of expansion and recession. Karen wanted to know what a government could possibly do to try and avoid the dismal prospect of repeated recessions on and on into the future that the business cycle seems to suggest is the fate of any economy.
To answer Alice's question, we can look at the United States right now, where the Bush administration and the Democratic led Congress have teamed up to approve a fiscal stimulus package aimed at boosting consumer spending and business investment, thus putting the economy back on the path of expansion and economic growth.
A government can only try to stimulate aggregate demand and/or aggregate supply in times of recession. The tools at the government's disposal include changing tax policies and increasing or decreasing government spending. In times of recession, tax cuts should encourage businesses and households to spend more, increasing GDP. Likewise, new government spending increases GDP directly. The current stimulus package approved by the White House and Congress focuses on the tax side. Listen to the excerpt from a recent episode of WBUR Boston’s OnPoint radio show.