Why might governments aim to boost AD during recessions?

Governments aim to boost Aggregate Demand (AD) during recessions to stimulate economic growth and reduce unemployment.

In more detail, a recession is characterised by a significant decline in economic activity, which often leads to higher unemployment rates and lower income levels. This can create a vicious cycle, as lower income levels lead to reduced consumer spending, which in turn leads to lower business profits and further job losses. To break this cycle, governments may aim to boost Aggregate Demand (AD), which is the total demand for goods and services within an economy.

One way governments can boost AD is through fiscal policy, which involves changes in government spending and taxation. For example, a government might increase its spending on public services, which can directly create jobs and indirectly stimulate demand by increasing people's income. Alternatively, a government might cut taxes, which leaves consumers with more disposable income to spend. Both of these measures can increase AD and help to stimulate economic growth.

Another way governments can boost AD is through monetary policy, which involves changes in interest rates and the money supply. For example, a central bank might cut interest rates, which makes borrowing cheaper and encourages businesses to invest and consumers to spend. Alternatively, a central bank might increase the money supply, which can lead to lower interest rates and stimulate spending and investment in this way.

Boosting AD can also have a positive effect on business confidence. If businesses expect demand for their products to increase, they are more likely to invest in new capacity and hire more workers, which can further stimulate economic growth.

However, it's important to note that boosting AD is not without risks. If a government increases spending or cuts taxes, it might have to borrow more, which can lead to higher public debt. Similarly, if a central bank cuts interest rates or increases the money supply, it might lead to higher inflation. Therefore, governments need to carefully balance the need to stimulate economic growth with the need to maintain fiscal and monetary stability.