SHUBHAM AHUJA

Section – A

EEP ASSIGNMENT

When there is a recession in the economy. What are the preventive steps taken by the government
to boost up the economy?

It is the situation in which there is a slowdown in the economic activities that

completely hampers the growth of an economy here the economic indicators such as GDP, Employment
rates and Corporate Profits tends to fall.

To tackle the problem of recession, Government always intervene in between with their Policies
to boost up the economy from the cage of recession.

It is the microeconomic policy laid down by the Central Bank that manage
the money supply in an economy. They increase liquidity to boost up economy growth and reduces
liquidity to prevent inflation. Here government uses the interest rate, bank reserve requirement, and the
amount of govt. bonds that banks must hold.

It is defined as the pattern of government spending and tax policies to influence

economic conditions that may include demand for products and services, employment, inflation and
economic growth.

Now comes to various things that can be done by the government to recover the economy from
recession.

1. Monetary Policy (cutting interest rates)

2. Quantitative Easing
3. Fiscal Policy (High government spending and Tax cuts)
4. Government bailout of major firms
5. Devaluation
6. Promote Foreign Direct Investment

 Cutting down interest rates by government will help

the economy to boost up and get out of the situation of recession. At the time of recession there
is a slowdown of economic activities and people have less spending power and they tend to
save more with themselves. so to solve this government cut down the interest rates to boost up
 SHUBHAM AHUJA
Section – A

the aggregate demand as lower interest rate reduces mortgage payments, and it gives consumer
more disposable income. Lower interest rates also encourage firms to spend rather than save so
this will eventually lead to creation of liquidity of money in the economy and can help to boost
up an economy.
In this Central bank buys the various assets i.e. commercial and govt.
bonds from commercial banks and for buy these assets central bank issue central bank reserves
(this is effectively creating the money in electronic form) that eventually helps the banks to
increase their liquidity as they sell assets for cash and it increase the ability of banks to lend
more and the people now take the loan more easily for various purposes like, new start-ups that
can help in creating employment opportunities , or to pay off loans. This technique helps the
economy to get out of the recession state.
 - Government can bailout the firms that is undergoing with financial
difficulties they may need high loan to pay off their debts and it can have adverse effect at the
time of recession as there is already shortage of money in the economy and these firms can
have the reasons for more unemployment and have negative multiplier effect. So it is better to
bailout these firms to minimise the economic downturns.
- during recession government adapts to have foreign direct
investment in our country, as it leads to have foreign firms to invest in our country in various
projects or to buy some assets, this lead to creation of employment opportunities as well as
inflow of foreign cash into our country and it helps in achieving the relief through recession.
- Another way to tackle with
recession is government starts spending in building infrastructures, bridges or the things for the
welfare of economy and it eventually helps in creating the employment opportunities for that
period and it lead to have more employment rates and results in more money flow in economy.
And government can cut down the taxes this will give the rebate for the consumers to pay less
in the time of recession and it boost up the consumer’s disposable income and therefore
increases spending.
 - Devaluation in exchange rate can cause a boost in aggregate demand. A fall in
the value of dollar makes the exports cheaper and imports more expensive and it creates
domestic demand and can cause inflow of foreign exchange.
 - It is a conscious decision to target growth rather than inflation. If the
economy gets stuck in a period of low inflation this cause low economic growth. Targeting
higher inflation rate helps to break the recession period of an economy.