What is the main reason for employing expansionary fiscal policy during a recession?

Expansionary fiscal policy involves increasing government spending, cutting taxes, or both to boost aggregate demand and revive economic growth. When the economy is in a recession, businesses and consumers spend less, leading to falling demand and higher unemployment. By increasing government spending or cutting taxes, expansionary fiscal policy aims to stimulate the economy by increasing demand, output, and employment.

When the government increases its spending, it injects more money into the economy. This can have a multiplier effect as the additional spending flows through the various sectors of the economy. The increased demand leads to higher production levels, which in turn create more jobs and boost people's incomes. As a result, consumer spending increases, further expanding aggregate demand and possibly pulling the economy out of a recession.

Tax reductions directly increase disposable income for households and businesses, giving them more money to spend or invest. This leads to increased consumption and investment, which contribute to higher aggregate demand. Similar to increased government spending, a tax cut can also have a multiplier effect on the economy, further helping to counter the effects of a recession.

One of the primary objectives of expansionary fiscal policy during a recession is to reduce unemployment. As government spending and tax cuts stimulate aggregate demand, businesses respond by increasing production and hiring more workers. This decrease in unemployment can lead to higher incomes and further consumer spending, creating a positive feedback loop for the economy.

Expansionary fiscal policy can also lead to higher inflation if it results in excessive demand and spending. In addition, increased government spending or reduced tax revenue may lead to a fiscal deficit, as the government may need to borrow to finance the expenditure. Policymakers have to consider these potential consequences and find a balance between stimulating the economy and managing inflation and fiscal deficit. In conclusion, the main reason for employing expansionary fiscal policy during a recession is to increase aggregate demand, spur economic growth, and reduce unemployment. It does this by increasing government spending, cutting taxes, or both, which can have a multiplier effect on the economy and help pull it out of a downturn.