How does a government intervene to move an economy out of a recession?

Expert Answers

An illustration of the letter 'A' in a speech bubbles

Government has many options towards ending a recession. Government can cut taxes on individuals and businesses in order to stimulate spending in these sectors. Businesses will ideally take the money that they would spend in taxes and use it to hire more workers or expand their operations. Individuals will take the money and hopefully shop, thus putting more money into the economic system. Cutting taxes does have drawbacks, however, as deficits can affect the economy adversely in later years.

In the United States, the Fed can also reduce its prime rate by which it loans money to banks. Dropping interest rates encourages investors to put their money into the stock market in order to have higher returns. Lower rates at the bank will also lead more people to borrow for big-ticket items such as cars and houses. These two parts of the economy employ other people through jobs related to the housing and auto sectors.

The government can also take on additional public works spending in order to curtail a recession by putting more people to work. This includes spending on infrastructure. This is only listed as a last resort, as these programs often primarily help the economies of a certain area, and many voters view them as pork barrel spending. Also, when the programs are over, people are back to being unemployed. The first two options are considered first, as they involve assisting private banks to stimulate the economy.

Approved by eNotes Editorial Team
An illustration of the letter 'A' in a speech bubbles

There are several ways that a government can intervene to steer an economy away from a recession. One such way is by changing tax policies. Reducing taxes or creating tax credits for businesses provides an incentive for businesses to increase their production, causing an infusion of money into the economy by means of increased employment. Reducing taxes or suspending taxes for consumers altogether, sometimes known as a tax holiday, puts more money in the pocket of the consumer and hopefully gives them incentive to spend more.

Another way that a government can stimulate the economy is by adjusting relationships with trade partners. By accepting more exports, manufacturing and production jobs are created, increasing employment. The government can also look better in the eyes of trade partners by cutting federal spending and decreasing their deficit, hopefully leading to more desirable terms of trade.

Approved by eNotes Editorial Team
An illustration of the letter 'A' in a speech bubbles

The government can do various things to try to get an economy out of a recession. One method to help get an economy out of a recession is to develop policies that allow consumers to have more money to spend. This can be done by cutting taxes or by temporarily suspending sales taxes, which is often called a sales tax holiday. When the government cuts taxes, consumers should have more money to spend, which should encourage them to buy more products. Businesses should make more products and hopefully hire more workers. With a sales tax holiday, sales taxes are suspended for a short period of time. This also is designed to increase consumer spending.

The government can reduce interest rates in an attempt to end a recession. When interest rates drop, businesses tend to invest. This may lead to more jobs being created, which allows more consumers to work, earn money, and spend it. Lower interest rates also encourage consumers to borrow money to finance the purchase of homes and other expensive items such as automobiles. As consumers buy more items, companies will need to hire more workers, which should help bring the recession to an end.

Approved by eNotes Editorial Team
An illustration of the letter 'A' in a speech bubbles

Governments can take action in fiscal policy and/or monetary policy to move their economies out of recession.

In fiscal policy, governments are supposed to lower taxes and increase spending.  This puts more money in the economy and thereby increases aggregate demand.  This, in theory, pulls the economy out of recession if taxes are reduced and spending is increased enough.

In monetary policy, the government is supposed to increase the money supply.  It can do this through such things as reducing interest rates and buying government securities on the open market.  These actions increase the supply of money and, in theory, pull the economy out of recession.

Approved by eNotes Editorial Team