The government expenditure during a recession does not decline. This is due to the inertia in government budgeting and spending process instead of financial activism. Net exports are that export-import increases during the recession. Domestic firms failing to experience sufficient demand in the indigenous market opt for selling the product abroad. If successful, it brings a shy of relief to the economy. So, if Y represents the GDP, then Y = C+I+G+NX, where C stands for consumption expenditure, I for investment expenditure and G for government expenditures respectively.
Then it has been analyzed till now that during a typical business cycle, which is a continuation of expansion and recession leading to crest and trough respectively. Consumption rises during expansion and reaches a peak before declining towards the trough. The investment follows the similar route and NX behaves oppositely to C and I. Since C and I are the main building blocks of GDP, the GDP as a whole expands during expansion reaches the peak and then experiences the recession to reach the trough. It is interesting to note that even if consumption expenditures experiences positive growth during the recession, due to the assured decline in investment during the recession, GDP always declines.
Phase wise, a business cycle consists of boom and slump. During the boom, GDP rises and during a slump, it falls. During the boom period, due to high demands, the price will rise and the rate of inflation is at a high. In contrast, during the slump period due to fall in aggregate demand, the rate of growth in the price level and movement of a market rate of interest is at a tune with the movement of the rate of inflation.
Facing a higher rate of inflation, the government raises the market rate of interest so that people may opt for an interest-bearing asset, bond rather than a non-interest bearing asset, money. When people purchase bonds using the excess supply, they have in their hand; excess liquid cash in the economy gets dried up. So in course of time, it becomes a major helping factor in facing inflation.
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