How would fiscal policy typically address a recession?

Fiscal policy is a key tool used by governments to influence the economy, particularly during periods of recession. When a recession occurs, economic activity contracts, leading to higher unemployment and reduced consumer spending. To address this, fiscal policy typically involves the government taking actions that aim to stimulate growth.

Increasing government spending is a direct method to inject money into the economy. When the government spends on infrastructure projects, public services, or social programs, it creates jobs and increases demand for goods and services. This infusion of spending helps to jumpstart economic activity, encouraging both businesses and consumers to spend more.

Cutting taxes complements this approach by leaving individuals and businesses with more disposable income. Lower taxes can lead to increased consumer spending since people have more money in hand. Similarly, businesses benefit from reduced tax burdens, allowing them to invest in expansion, hire new employees, or raise wages.

Together, these two strategies — increasing government spending and cutting taxes — work to create a multiplier effect in the economy, amplifying the impact of fiscal policy interventions during a recession. This is why the choice of increasing government spending and cutting taxes is a typical and effective response to economic downturns.