Which of these fiscal policy actions will increase real GDP in the short run? When the economy is in a recession, the government can: increase government purchases or decrease taxes in order to increase aggregate demand. reduce expenditures and leave taxes constant in order to stimulate aggregate demand.

Which of these would be a fiscal policy the government might want to use if the economy is operating at too high a level of output? Increasing income tax rates. When the economy is in a recession, the government can: Increase government purchases or decrease taxes in order to increase aggregate demand.

Two examples of automatic stabilizers are unemployment insurance payments, which increase during a recession as more workers become unemployed, and income taxes, which decrease during a recession as incomes fall.

The best-known automatic stabilizers are progressively graduated corporate and personal income taxes, and transfer systems such as unemployment insurance and welfare. Automatic stabilizers are called this because they act to stabilize economic cycles and are automatically triggered without additional government action.

Automatic stabilizers help cushion the impact of recessions on people, helping them stay afloat if they lose their jobs or if their businesses suffer. They also play a vital macroeconomic role by boosting aggregate demand when it lags, helping make downturns shorter and less severe than they otherwise would be.

Automatic stabilizers offset fluctuations in economic activity without direct intervention by policymakers. When incomes are high, tax liabilities rise and eligibility for government benefits falls, without any change in the tax code or other legislation.

Automatic stabilizers are mechanisms built into government budgets, without any vote from legislators, that increase spending or decrease taxes when the economy slows.

are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession. are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession. All of the above are correct.

A central bank, such as the Federal Reserve in the U.S., will use expansionary monetary to strengthen an economy. The three key actions by the Fed to expand the economy include a decreased discount rate, buying government securities, and lowered reserve ratio.

Monetary policy attempts to increase aggregate demand during recession by increasing the growth of the money supply. The theory of liquidity preference suggests that increasing the money supply will cause interest rates to fall. Lower interest rates cause higher investment spending which increases aggregate demand.

In a deep recession and liquidity trap, fiscal policy may be more effective than monetary policy because the government can pay for new investment schemes, creating jobs directly – rather than relying on monetary policy to indirectly encourage business to invest.

By August 2007, the Federal Reserve responded to the subprime mortgage crisis by adding $24 billion in liquidity to the banking system. 1 By September 2008, Congress approved a $700 billion bank bailout, now known as the Troubled Asset Relief Program.