Using what you have learned in this unit, choose a FISCAL policy that you would

Question

Using what you have learned in this unit, choose a FISCAL policy that you would recommend to help an economy that is in a recession. Make sure you pick a specific government or tax policy. Saying to increase government spending or an expansionary policy is not a fiscal policy and does not answer the question. 
You should not choose a monetary policy (i.e. interest rate manipulation, selling of bonds, or printing of money).
Explain how your policy would help increase aggregate demand. That is, does it increase C, I, G, or X? 

Explain what would happen to prices (i.e. inflation). 

You may use either the Modern Keynesian model or the Classical Model to conduct your analysis. Just be sure to note which one you are using.

Explanation / Answer

In order to help an economy recover from a recession, I would recommend a cut in the corporate and income tax. This would increase the consumption spending as well as investment spending. I am using the modern Keynesian model. When there is a cut in the income tax, the disposable income left with individuals increase. Due to higher disposable income, consumption spending would increase which can lift the aggregate demand of the economy. When corporate taxes are cut, the companies have more of the profit left with them which they can distribute as dividends to the shareholders or they can reinvest. Both these activities will increase the consumption spending and investment spending. This will in turn increase the aggregate demand and thus drive up prices which would then lead the country out of a recession.

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