Explain how an increased federal budget deficit resulting from a recession can actually help stabilize an economy

What will be an ideal response?

Help in stabilizing the economy can come through three different channels: transfer payments, household incomes, and corporate taxes. Transfer payments increase during a recession, and these transfer payments increase the income of their recipients. In doing so, they partly offset the fall in household income which results from recessions and slows the decline in consumer spending. Households whose incomes are falling due to a recession pay less in taxes, which partly offsets the income decline and slows the decline in consumer spending. The corporate tax depends on corporate profits, and since profits fall in a recession, corporate taxes also fall. Lower corporate taxes enable businesses to reduce the spending cuts they would otherwise face during a recession.