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  • Publicado : 9 de diciembre de 2010
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Fiscal Policy
• The inherent problem here is to get Spain out of the recession, the best way is through fiscal policies.
• Unemployment is the consequence of recession as firm’s will cutcosts getting rid of factors of production, causing aggregate demand in the economy to fall. However we can use fiscal policy to manipulate governments income and expenditure to achieveour socio economic objectives.
• If govt raises both indirect and direct taxes then the masses would have less disposable income meaning less investment from companies and leading to lessspending in the economy overall. From the graph if AD shifts to left price levels goes down and hence inflation would too. However it is best to decrease both indirect and direct taxes toachieve exactly the opposite, increasing spending and investment in the economy overall therefore causing an injection of income and increasing aggregate demand.
• Recession at Y1, meansthere is less than full employment, unemployed resources equals wages fall, less costs for suppliers, SAS1 shift to SAS2. Too long, so the short and efficient way is increase in governmentexpenditures should be sufficient to cause the aggregate demand curve to shift to the right from AD1 to AD2, restoring the economy to the natural level of real GDP.

(IF POSSIBLE SAY)The downfall will be argued by other groups as being inflation. However, lets keep in mind that:
1) The government actually does want some inflation in the economy, so increasing it by 1or 2 percent might potentially reduce the levels of debt
2) Inflation rises but it's an acceptable payoff to allow spain to come out of the recession
Increasing government spending willincrease the activity in the economy and although in the SHORT TERM the deficit of the government will rise, in the long term once Spain’s out of the recession it can aim to reduce it.
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