Describe how the government can reduce recession by implementing the following

policies:

a) Monetary policy
b) Fiscal policy

Monetary policy refers to a policy used by the central bank to control the supply of money
as an instrument for achieving the ultimate objectives of the economic policy, such as
price stability or low unemployment (Tey Hwei Choo et al., 2017). It is because the central
bank manage the amount of liquidity in financial system regarding the interest rates or
loan s, mortgages and bonds.

There two types of monetary policy which are expansionary monetary policy and
contractionary monetary policy. To reduce recession, the central bank implementing the
expansionary policy. The objective this method is to increase money supply therefore, the
real gross domestic (GDP) will also increase. Thus, the unemployment level will
decrease.

The general tools of the quantitative instruments in the monetary policy are using
expansionary open market operation, reducing the required reserve ration and the bank
rate will be reduced by the central bank. Then, for the direct tools of the qualitative
instuments in this monetary policy are the central bank decreasing the margin
requirement and the central bank should not restrict regarding the direct credit controls
on bank lending.

Fiscal policy refers to a policy which affects the aggregate demand by altering the
balance between government expenditure and taxation (Tey Hwei Choo et al.,2017).
This policy relates with the government management of economy by measuring the size
and what kind of economy we have, what kind od taxation, public debt, government
expenditure and government revenue.

This policy also has a variety type of policy which is contractionary fiscal policy and
the second one is expansionary fiscal policy. When there is a recessionary, the
government will use the expansionary fiscal policy. This policy aims to increase the
government expenditure and decrease the taxes. The use of this expansionary fiscal
policy will result in a shift of the aggregate demand curve to the right, thus closing the
recessionary gap and promoting economic growth.

Fiscal policy is needed to maintain the stability of an economy especially during

the financial crisis and the debt crisis by using the expansionary policy. It is because this
kind of policy will decrease the number of unemployment and able to increase the general
level of real income .

Figure 1.0

The figure 1.0 shows the curve of aggregate demand (AD). If effective expansionary fiscal
and expansionary monetary policy will increase AD and lead to increase in real GDP.