Final answer:
During recessions, the government can increase government spending, decrease taxes, or use a combination of both to stimulate economic growth.
Step-by-step explanation:
In a recession, when output is below natural output (yt), the government can use a combination of fiscal policies to stimulate the economy. One way to increase output is by increasing government spending (g). This can be done by investing in infrastructure projects, education, or healthcare, which can create jobs and boost economic activity. Another way is by decreasing taxes (t), which puts more money in the hands of consumers and businesses, encouraging spending and investment.
For example, during the Great Recession in 2009, the US government implemented fiscal stimulus packages that included a combination of tax cuts and increased government spending to help stimulate the economy and restore output to its natural level. These policies aimed to increase aggregate demand and encourage businesses to invest and hire more workers.
Therefore, during recessions, increasing government spending (g), decreasing taxes (t), or both can be used to counteract the decline in output and stimulate economic growth.