📚 Learning Guide
Recession and Fiscal Policy Actions
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How does an increase in government spending during a recession typically affect the unemployment rate and aggregate demand?

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Choose the Best Answer

A

It decreases unemployment and increases aggregate demand

B

It increases unemployment and decreases aggregate demand

C

It has no effect on unemployment or aggregate demand

D

It increases both unemployment and aggregate demand

Understanding the Answer

Let's break down why this is correct

Answer

When the government increases its spending during a recession, it aims to boost the economy by creating jobs and increasing demand for goods and services. This extra spending can help reduce the unemployment rate because it leads to more projects and services that require workers. For example, if the government invests in building new roads, it creates jobs for construction workers, engineers, and suppliers, which puts more money into people's hands. As these workers spend their earnings, businesses see higher demand for their products, which can help lift the economy out of recession. Overall, this increase in government spending encourages more economic activity, helping to lower unemployment and improve aggregate demand.

Detailed Explanation

When the government spends more money, it creates jobs. Other options are incorrect because Some might think that more spending leads to job loss; It's a common belief that spending has no impact.

Key Concepts

unemployment rate
aggregate demand
Topic

Recession and Fiscal Policy Actions

Difficulty

medium level question

Cognitive Level

understand

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