If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be:
A) Increased government spending or increased taxation, or a combination of the two actions
B) Increased government spending or decreased taxation, or a combination of the two actions
C) Increased government spending or increased taxation, but not a combination of the two actions
D) Decreased government spending or decreased taxation, or a combination of the two actions

Question

Quizplus · Accepted Answer

During a recession, the government may use discretionary fiscal policy to stimulate the economy. This involves increasing government spending or decreasing taxes, or a combination of both. By increasing government spending, more money flows into the economy and creates more jobs, which in turn increases consumer spending. By decreasing taxes, individuals have more disposable income to spend, which also increases consumer spending. However, increasing taxation during a recession would likely reduce consumer spending, which would hinder efforts to stimulate the economy. Therefore, increased government spending or decreased taxation, or a combination of the two, would be the most appropriate discretionary fiscal policies to correct a recession.

If the Economy Is in a Recession and Prices Are