I would highly recommend a strategy that lines up with the classic model to help steer the country out of a recession. The type of fiscal policy is going to affect the four types of aggregated demand which are Consumption, Investment, Net exports and Government spending. If the economy is in a recession that means that unemployment numbers are high. The first thing thing the policy would target would be job creation. How can we get the people out working, earning an income? Tax incentives and tax cuts to companies that are willing to continue their production and hire new people and also to individuals and companies that are willing takes the risk to start their business ventures. “The underlying economy is one in which unemployment can arise but can be mitigated by tax cuts and increases in public production” (Battaglini & Coate, 2016). “In the presence of unemployment, reducing taxes increases private sector hiring, while increasing public production creates public sector jobs” (Battaglini & Coate, 2016). At the same time that we are giving companies tax breaks to hire employees I would recommend the government invest in the maintenance and construction of infrastructure. Road, bridge and building projects all get people out working. It would be costly to the government but not implementing it will eventually cost more. These projects not only employ those individuals that are working on the project but it also affects those individuals involved in the production of materials, the people transporting and selling the materials. Creating jobs and cutting taxes will help increase the GDP. People with jobs have money to spend. There is no one thing that will increase inflation. In order for the inflation rate to increase a combination of things must happen. People with jobs increase the consumption and government projects will also increase aggregate for demand. Level of investment will also increase when we implement tax cuts and government spending. Companies will be more willing to invest if they see a gleam of the economy turning around. Initially it will cost the government a lot of money but failure to implement fiscal policy that gets the country out of a recession will cost a whole lot more.
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Battaglini, M., & Coate, S. (2016). A POLITICAL ECONOMY THEORY OF FISCAL POLICY AND UNEMPLOYMENT. Journal Of The European Economic Association, 14(2), 303-337.
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