During a recession, policymakers typically have the following options:
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Conduct active monetary or fiscal policy to shift aggregate demand to the right - This is usually the primary response to a recession. Policymakers may lower interest rates (monetary policy) or increase government spending/cut taxes (fiscal policy) to stimulate aggregate demand and boost economic activity.
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Do nothing and wait for long-run adjustments to return the economy to full employment - Some policymakers may choose to adopt a more hands-off approach, allowing the economy to correct itself over time. This option may be based on the belief that market forces will eventually lead to recovery without intervention.
The other options are generally not pursued during a recession:
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Conduct active monetary or fiscal policy to shift aggregate demand to the left is not a typical policy response during a recession, as this would further decrease demand and worsen economic conditions.
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Conduct active monetary or fiscal policy to shift aggregate supply to the left is also not a typical response. Shifting aggregate supply to the left would raise prices and reduce output, which is counterproductive during an economic downturn.
So, the correct options are:
- Conduct active monetary or fiscal policy to shift aggregate demand to the right
- Do nothing and wait for long-run adjustments to return the economy to full employment