Which of the following statements about fiscal policy is the best description of "fine tuning"?
A)The government increases its spending to reduce an inflationary gap.
B)The government cuts taxes to remove a large and persistent recessionary gap.
C)The government continuously alters its spending and taxing plans to hold real GDP at potential.
D)The government decreases tax rates to decrease an inflationary gap.
E)The government uses automatic stabilizers to reduce any output gaps.

Question

Quizplus · Accepted Answer

Fine tuning refers to the continuous adjustment of fiscal policy (spending and taxing) by the government to ensure that the economy is operating at its potential level of output. This may involve both increasing or decreasing spending or taxes, depending on the economic situation, in order to steer the economy towards full employment and stable prices. Option C correctly describes this concept. Options A and D refer to specific instances of policy action rather than the continuous adjustment of policy, while option B refers to a one-time action in response to a recessionary gap. Option E refers specifically to automatic stabilizers, which are a feature of fiscal policy that can aid in stabilizing the economy, but is not a description of fine tuning.

Which of the Following Statements About Fiscal Policy Is the Best