Final answer:
Following a negative aggregate demand shock, an expansionary fiscal policy is prescribed to mitigate recessionary impacts by stimulating the economy, increasing aggregate demand, and reducing unemployment.
Step-by-step explanation:
After a negative aggregate demand shock, targeting the deficit typically involves counterbalancing with expansionary fiscal policy. This policy consists of a mix of tax cuts and spending increases.
Negative shocks can lead to a recessionary environment, with lower aggregate demand and higher unemployment. As a result, personal incomes and corporate profits tend to decrease, which automatically reduces tax revenues due to lower tax liabilities. Consequently, government spending on social safety net programs like unemployment benefits and welfare tends to increase.
This expansionary fiscal policy aims to stimulate the economy and shift aggregate demand to the right, pushing it back towards potential GDP and helping to reduce unemployment.