A recession is a crisis at the macroeconomic level, distinguished by a sharp decline in financial activity. Under its conditions, the inflation rate decreases due to reduced consumer incomes and has no favorable effects. Moreover, the high level of unemployment and, consequently, the lack of business activity and investment carries substantial risks. The application of fiscal and monetary instruments is the primary way to reduce hazards and stabilize the economy.
Deflation leads to a general price level decline and affects aggregate demand negatively. According to Keynesian theory, it can cause a lack of income to support consumption (Hansen, 2018). Therefore, in the Macropoland case, the economy needs an increase in inflation rates, which can be gained through taxes and government spending transformations. The state can reduce income and corporate taxes, which will expand the share of disposable income of the population and the reserved returns of enterprises. Moreover, government spending can stimulate aggregate demand growth and, hence, GDP production.
Furthermore, Macropoland faces high unemployment; therefore, an expansionary monetary policy that strives to expand overall economic activity should also be implemented. The most beneficial instrument is lowering interest rates, making saving funds relatively unprofitable (Hansen, 2018). It will lead to a proliferation in consumer spending on miscellaneous goods and services and an increase in the money supply in the market. With cheap financing, businesses and corporations will invest money in production units, investment projects, and other business-related activities that will raise employment rates.
Henceforward, individuals will have jobs and higher income spent on purchases and investments, thereby increasing aggregate effective demand. Lower interest rates stimulate consumption because more utility is obtained from spending on goods and services than saving. An example of this expansionary approach is the low or zero interest rates that have persisted in numerous of the world’s leading economies since the financial crisis of 2008 (Hansen, 2018). As more money enters the market, overall economic activity rises, sustaining a country from recession.
In conclusion, it is significant to state that recession is a dangerous phenomenon characterized by a decrease in the state’s financial performance. In order to ensure the macroeconomic growth of Macropoland, it is essential to apply fiscal and monetary policy instruments such as government spending, taxes, and lower interest rates. It will increase inflation, stimulate more investment, reduce unemployment rates, and stabilize the state’s economy.
Hansen, A. H. (2018). Monetary theory and fiscal policy. Pickle Partners Publishing.