Chapter 11: Problem 15

To end a bad recession, we need to (LO7) a) go to war b) spend a lot of money c) balance the federal budget

Short Answer

Expert verified

The most effective option for ending a bad recession is to spend a lot of money (Option B) by increasing government spending or providing fiscal stimulus, as this can boost aggregate demand, leading to increased production and hiring which contributes to economic growth. Going to war (Option A) can have significant downsides and long-term costs that outweigh economic benefits, while balancing the federal budget (Option C) can have contractionary effects on the economy in the short run, potentially worsening the recession.

Step by step solution

Understand the problem

In this exercise, we have to determine the best option for ending a bad recession. There are three proposed options: a) Go to war b) Spend a lot of money c) Balance the federal budget To answer this question, we need to understand the impact of each option on the economy and how it can potentially help end the recession.

Evaluate Option A: Go to war

Going to war is a proposed option for ending a recession. Wars can stimulate the economy, as they generally increase government spending and encourage private investment in industries related to the war effort. However, wars also have significant downsides like loss of life, destruction of infrastructure, and negative impacts on international trade. In the long term, the costs of a war can outweigh the economic benefits. Thus, going to war is not the most effective way to end a recession.

Evaluate Option B: Spend a lot of money

Another option is to spend a lot of money. This strategy refers to increasing government spending (e.g., infrastructure, public services, unemployment benefits) or providing fiscal stimulus (e.g., tax cuts, direct payments) to boost aggregate demand. By doing so, businesses would have more demand for their products, which can lead to increased production and hiring, ultimately contributing to economic growth. This is a common strategy in countercyclical fiscal policy and can be effective in ending a recession.

Evaluate Option C: Balance the federal budget

The last option presented is balancing the federal budget. This involves increasing revenues (through tax increases) and reducing spending (through spending cuts) to bring the budget deficit to zero. While balancing the budget may be an important long-term goal, it can have contractionary effects on the economy in the short run. As a result, balancing the budget during a bad recession can make the economic situation worse.

Determine the best option for ending a recession

Based on the analysis of the three options, the best option for ending a bad recession is to spend a lot of money (Option B). While there can be other factors to consider and the specific policies should be tailored to an individual country's context, increasing government spending or providing fiscal stimulus generally has a more immediate and positive impact on the economy during a recession compared to the other options.