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When a country is experiencing instability, governments would attempt to alter the current economic situations by implementing policies. Governments control fluctuations in economic activities through three policies when necessary; fiscal, monetary and supply-side policy. Fiscal and monetary policy alters the economy by creating changes in the aggregate demand. On the other hand, supply side policy changes the aggregate supply in the economy.
Fiscal policy stabilizes the economy via changes in government spending or tax. (Sullivan and Sheffrin, 2006) In a recession, an expansionary fiscal policy is most suitable to recover the economy from its slump. The government would increase government expenditure and decrease taxation to increase the GDP level.
With the aid of a diagram, an increase in government expenditure would increase the aggregate demand (AD), thus shifting the AD curve to the right (AD1). This would then increase the GDP level (yp). Similarly, a reduction tax would......

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Approximate Word Count: 1990
Approximate Pages: 8 (250 words per double-spaced page)

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