What constitutes a correct fiscal policy response to a recession caused by a decrease in aggregate demand?

A correct fiscal policy response to a recession caused by a decrease in aggregate demand is to increase government spending and decrease taxes. This approach aims to stimulate economic activity by boosting consumer and business spending. When the government increases its spending, it directly injects money into the economy, creating jobs and increasing demand for goods and services.

At the same time, by decreasing taxes, households have more disposable income, which encourages them to spend more. This dual strategy works to shift aggregate demand to the right, helping to counteract the effects of the recession.

Maintaining current government spending and taxes would not address the underlying issue of low demand, while decreasing spending and increasing taxes would further contract the economy, exacerbating the recession. Therefore, increasing spending and reducing taxes is essential to effectively stimulate economic growth during such periods.