Which type of fiscal policy action is most appropriate during an economic boom to prevent overheating and inflationary pressures?

Question

BlackTom AI · Accepted Answer

Contractionary fiscal actions—raising taxes or cutting government spending/subsidies—are used to cool an overheating economy and reduce inflationary pressures.

1. Relevant knowledge points and concepts
- Fiscal policy: government choices on taxes and spending. Expansionary fiscal policy raises aggregate demand (AD); contractionary fiscal policy lowers AD.
- Aggregate demand identity: AD = C + I + G + (X − M). Reducing G or reducing components of C or I shifts AD left, lowering output and inflationary pressures.
- Overheating/inflation: occurs when AD exceeds short-run aggregate supply, creating an inflationary gap; contractionary fiscal policy is appropriate to close that gap.

2. Step-by-step reasoning
- During a boom with inflationary pressures, policymakers want to reduce AD to avoid overheating.
- Option a (reducing targeted subsidies): a subsidy is a government transfer that effectively raises firms’ net receipts and can increase output/investment. Cutting subsidies lowers government outlays (reduces G) and reduces incentives for excess production/investment in subsidized sectors, thereby reducing AD.
- Option c (increasing corporate taxes): higher corporate taxes reduce after-tax profits, lowering planned investment (I) and possibly reducing hiring/wages (C). Lower I and C reduce AD.
- Both actions directly reduce components of AD and so are contractionary fiscal measures.

3. Intermediate-expression steps
- AD = C + I + G + (X − M)
- If ΔG < 0 (cut subsidies) then ΔAD = ΔG (negative)
- If ΔT_corp > 0 → ΔI < 0 and possibly ΔC < 0 → ΔAD negative
- Net effect: AD shifts left → reduced inflationary gap.

4. Why the correct answers are correct
- a and c are fiscal tools that lower AD and cool the economy, directly addressing overheating and inflation.

5. Why the other options are incorrect
- b (building more roads and railways) increases G (expansionary), which would raise AD and worsen overheating.
- d (reducing the money supply) is a monetary policy tool carried out by the central bank, not a fiscal policy action; while it can cool inflation, it is not a fiscal measure and therefore not the best answer to a fiscal-policy question.

6. Conclusion
- The appropriate fiscal actions during a boom to prevent overheating are a. Reducing targeted subsidies to specific industries and c. Increasing corporate taxes. This matches the provided correct answer.

Which type of fiscal policy action is most appropriate during an economic boom to prevent overheating and inflationary pressures?多项选择题

类似问题

Which of the following is not a strength of using fiscal policy as a tool to achieve macroeconomic goals?

Which of the following is the least likely effect of an increase in government spending?

Which of the following is the least likely effect of an increase in government spending?

Automatic fiscal stabilisers:

Many economists oppose a constitutional amendment that would require a balanced budget for the federal government because it would probably make the business cycle more volatile.

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Keynesians government policies include investments in capital. These include

Effective Keynesian government policies to promote long term economic growth might include:

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单

Which type of fiscal policy action is most appropriate during an economic boom to prevent overheating and inflationary pressures?多项选择题

类似问题

Which of the following is not a strength of using fiscal policy as a tool to achieve macroeconomic goals?

Which of the following is the least likely effect of an increase in government spending?

Which of the following is the least likely effect of an increase in government spending?

Automatic fiscal stabilisers:

​Many economists oppose a constitutional amendment that would require a balanced budget for the federal government because it would probably make the business cycle more volatile.

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Keynesians government policies include investments in capital. These include

Effective Keynesian government policies to promote long term economic growth might include:

更多留学生实用工具

希望你的学习变得更简单

Many economists oppose a constitutional amendment that would require a balanced budget for the federal government because it would probably make the business cycle more volatile.