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    Question

    What should be done in an economy to reduce the effects

    of recession?
    A Interest rate should be increased Correct Answer Incorrect Answer
    B Taxes should be increased Correct Answer Incorrect Answer
    C Expenditure on public projects should be increased Correct Answer Incorrect Answer
    D Interest rate and taxes should be increased Correct Answer Incorrect Answer

    Solution

    A recession is a significant decline in economic activity, lasting more than a few quarters. There is a drop in the following five economic indicators: real GDP, income, employment, manufacturing, and retail sales. However, usually a negative GDP growth rate for 2 consecutive quarters is considered as recession. To counter a recession expansionary monetary and fiscal policy should be used. E xpansionary monetary policy will increase the money supply and reduce interest rates. This will reduce cost of borrowing and encourage business investment. Fiscal policy should also be expansionary. When the country is in a recession , the government will increase spending, reduce taxes, or do both to expand the economy.

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