An appropriate ﬁscal policy for a severe recession is
A) a decrease in government spending.
B) a decrease in tax rates.
C) appreciation of the dollar.
D) an increase in interest rates.

Question

Quizplus · Accepted Answer

During a severe recession, the economy needs stimulation through increased spending, which can be provided by decreasing tax rates. This can provide consumers with more disposable income and encourage them to spend more, ultimately leading to an increase in aggregate demand and a boost to the economy. Decreasing government spending (choice A) can have the opposite effect by decreasing demand in the economy. Appreciation of the dollar (choice C) can have the effect of making exports more expensive and therefore decreasing demand for them. Additionally, an increase in interest rates (choice D) can make borrowing more expensive and ultimately decrease consumer spending. Therefore, choice B is the most appropriate fiscal policy for a severe recession.

An Appropriate ﬁScal Policy for a Severe Recession Is