If there is recession in the economy and the government opted for expansionary fiscal policy there will be:

Question

BlackTom AI · Accepted Answer

Expansionary fiscal policy increases aggregate demand by raising government spending (G) and/or reducing taxes (T), which boosts output and employment during a recession.

1) Relevant knowledge points and concepts
- Aggregate demand (AD) identity: Y = C + I + G + NX. In a recession Y is below potential, so policy aims to raise AD.
- Fiscal policy instruments: government purchases (G) and taxes (T). Increasing G directly raises AD; cutting taxes raises households’ disposable income and consumption (C).
- Fiscal multipliers: the government spending multiplier = 1/(1 − MPC). The tax multiplier = −MPC/(1 − MPC). MPC = marginal propensity to consume.

2) Step-by-step reasoning
- Recession implies negative output gap → need expansionary policy to increase AD.
- Raising G shifts AD up directly by the full amount of the spending increase multiplied by the spending multiplier.
- Cutting T increases disposable income; households spend a fraction (MPC) of that extra income, further increasing AD via the tax multiplier.
- Therefore the standard expansionary approach is to increase government purchases and decrease taxes.

3) Calculations (intermediate steps) — numerical illustration
Assume MPC = 0.8.
- Spending multiplier = 1/(1 − 0.8) = 1/0.2 = 5.
- If ΔG = +$100 → ΔY = 5 × $100 = +$500.
- Tax multiplier = −MPC/(1 − MPC) = −0.8/0.2 = −4. A tax cut ΔT = −$100 gives ΔY = (−4) × (−$100) = +$400.
- Combined ΔY = +$500 + $400 = +$900, a substantial boost to output.

4) Why the correct answer is correct
Increasing government purchases raises AD directly and cutting taxes increases consumption indirectly; together they maximize the expansionary impact and are standard remedies for recession.

5) Why the other options are incorrect
- Decrease government purchases and increase taxes: both actions are contractionary, deepening the recession.
- Increase government purchases and taxes: mixed effects; the tax increase offsets some of the spending stimulus, making policy less effective or possibly neutral depending on magnitudes.
- Decrease government purchases and taxes: ambiguous and likely insufficient—cutting G reduces AD directly while tax cuts only partially offset that decline.

6) Conclusion
Therefore, the appropriate expansionary fiscal policy in a recession is to increase government purchases and decrease taxes, which matches the provided answer: Increase government purchases and decrease taxes.

If there is recession in the economy and the government opted for expansionary fiscal policy there will be:单项选择题

类似问题

Expansionary fiscal policy in an open economy with a fixed exchange rate will likely:

Contractionary fiscal policy in an open economy with a floating exchange rate will likely ____ a trade surplus.

Contractionary fiscal policy in an open economy with a fixed exchange rate will likely ____ a trade surplus.

Expansionary fiscal policy in an open economy with a floating exchange rate will likely ____ a trade deficit.

Expansionary fiscal policy in an open economy with a fixed exchange rate will likely ____ a trade deficit.

A reduction in direct taxes will result in:[Fill in the blank]

When the government reduces taxes:[Fill in the blank]

Which of the following is the best example of a way in which fiscal policy can positively influence aggregate supply?

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