Final answer:
In a recession, appropriate fiscal policies include decreasing taxes or increasing government spending, which aligns with expansionary fiscal policy. During inflation, cutting government spending or increasing taxes helps reduce aggregate demand. For monetary policy, increasing the money supply and decreasing interest rates can help in a recession, while increasing interest rates can address inflation.
Step-by-step explanation:
Fiscal and Monetary Policy in Keynesian Economics.If the economy is at the intersection of AS1 and AD4, and we're experiencing a recession indicated by high unemployment and low output, the appropriate fiscal policy to stimulate the economy would be to either decrease taxes or increase government spending. These actions are in line with expansionary fiscal policy, which aims to increase aggregate demand (AD), stimulate output, and decrease unemployment. Conversely, if we're dealing with inflation, where demand outstrips supply leading to high prices, then the recommendation would usually be to cut government spending or increase taxes, which can help reduce aggregate demand. In the context of monetary policy, to combat recession, the central bank might increase the money supply or decrease interest rates to encourage borrowing and spending. However, if the economy is experiencing inflation, the central bank would usually increase interest rates to reduce spending and borrowing, thereby decreasing the money supply. Regarding the Keynesian framework and AD/AS diagram, certain government policies can address different economic issues. For instance, a surge in military spending or a reduction in taxes for businesses can help tackle a recession by shifting the aggregate demand curve to the right, thus increasing income and price levels. On the other hand, a tax increase on consumer income can be a solution to inflation as it will decrease consumption and shift the aggregate demand curve to the left, reducing income and price levels.