What is the role for aggregate demand managemant policies in moving the economy out of recession? What factors influence the effectiveness of demand management policies? Thank you,

-- Linda Ooi (linda_ooi@hotmail.com), May 06, 2000

Answers

A recession strikes when there isn't enough aggregate demand--when the amount of consumption goods, investment goods, government purchases, and net exports that people want to buy is less than the economy's productive potential.

To pull the economy out of a recession, the government should take steps to increase the four components of aggregate demand. Monetary policy that reduces interest rates will spur businesses to borrow more money and spend it buying more investment goods. Monetary policy that reduces interest rates will also lower the value of the currency, and so make foreigners buy more exports.

Fiscal policy measures--tax cuts that boost consumer spending, and direct increases in government purchases--can boost the other two pieces of aggregate demand. In fact, fiscal policy goes to work to help pull the economy out of a recession even without explicit action in Washington: the way that our tax and social insurance system is designed, tax collections automatically fall and government spending on programs like food stamps and unemployment insurance rises automatically in a recession.

One important point to remember, however, is that all these policies (save the "automatic" fiscal policy that is designed into our tax and social insurance systems) take time. Cuts in interest rates don't do much to affect spending in less than a year. Presidential proposals to change tax laws or spending programs don't do much to affect spending in less than two years

Unless the recession is abnormally long, it is likely to be over before the policies enacted to fight it have time to take effect.

-- Bradford DeLong (delong@econ.berkeley.edu), May 06, 2000.

recession is a bitch. I lost my job as a political analisist.

-- ryu tsui sen (ryu_tsui_sen@hotmail.com), June 10, 2002.