During a recession, expansionary fiscal policy may involve: A. Cutting social welfare programs B. Raising interest rates to control inflation C. Implementing trade barriers to protect domestic industries D. Increasing government spending and reducing taxes
Question
During a recession, expansionary fiscal policy may involve: A. Cutting social welfare programs B. Raising interest rates to control inflation C. Implementing trade barriers to protect domestic industries D. Increasing government spending and reducing taxes
Solution
The correct answer is D. Increasing government spending and reducing taxes.
Here's why:
A. Cutting social welfare programs: This is not an expansionary policy. It's a contractionary policy because it reduces government spending.
B. Raising interest rates to control inflation: This is a monetary policy tool, not a fiscal policy tool. Also, it's a contractionary measure, not an expansionary one.
C. Implementing trade barriers to protect domestic industries: This is a trade policy, not a fiscal policy.
D. Increasing government spending and reducing taxes: This is an expansionary fiscal policy. The government increases spending to stimulate the economy and reduces taxes to increase disposable income for households, encouraging them to spend more. This increased spending can help to stimulate the economy during a recession.
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