Which of the following would be the best fiscal policy to use during a recession?
Expansionary fiscal policy is most appropriate when an economy is in recession and producing below its potential GDP. Contractionary fiscal policy decreases the level of aggregate demand, either through cuts in government spending or increases in taxes.
What happens to aggregate demand when transfer payments and the taxes to pay them both rise by the same amount?
What happens to aggregate demand when government spending and the taxes to pay for it both rise by the same amount? Aggregate demand falls by the amount of the government spending. There is no effect.
Do transfer payments increase money supply?
The payments may be viewed as boosting industrial activity and employment. However, government transfer payments do not boost production or economic activity.
Is a tax cut or spending increase intended to increase aggregate demand?
A tax cut intended to increase aggregate demand is an example of: Fiscal stimulus. *The fiscal policies available to the federal government for increasing aggregate demand are to increase government spending, decrease taxes, or increase transfer payments.
What is the effect of a low income multiplier?
With a low multiplier, by contrast, changes in aggregate demand will not be multiplied much, so the economy will tend to be more stable. However, with a low multiplier, government policy changes in taxes or spending will tend to have less impact on the equilibrium level of real output.
What happens to aggregate demand and supply in a recession?
With a fall in aggregate demand and lower economic growth, this puts downward pressure on prices. In a recession, you are more likely to see shops selling at a discount to sell unsold goods. Therefore, we tend to get a lower inflation rate.
How does an economy self correct from a recession?
The self-correction mechanism acts to close a recessionary gap with lower wages and an increase in the short-run aggregate supply curve. The key to this process is that changes in wages and other resource prices cause the short-run aggregate supply curve to shift.
What acts as a automatic stabilizer to sustain the economy from depression to recovery?
The best-known automatic stabilizers are progressively graduated corporate and personal income taxes, and transfer systems such as unemployment insurance and welfare. Automatic stabilizers are called this because they act to stabilize economic cycles and are automatically triggered without additional government action.
What are automatic stabilizers How are they supposed to help an economy grow if demand falls and how are they supposed to slow growth if the economy is doing well?
Automatic stabilizers are mechanisms built into government budgets, without any vote from legislators, that increase spending or decrease taxes when the economy slows.
What are a few automatic stabilizers and tell how they work?
Automatic stabilizers offset fluctuations in economic activity without direct intervention by policymakers. When incomes are high, tax liabilities rise and eligibility for government benefits falls, without any change in the tax code or other legislation.
What is a discretionary stabilizer?
Automatic stabilizers are limited in that they focus on managing the aggregate demand of a country. Discretionary policies can target other, specific areas of the economy. Automatic stabilizers exist prior to economic booms and busts. Discretionary policies are enacted in response to changes in the economy.
How can discretionary fiscal policy be used to overcome a recession?
An expansionary discretionary fiscal policy is typically used during a recession. A decrease in taxation will lead to people having more money and consuming more. This should also create an increase in aggregate demand and could lead to higher economic growth. Along with tax cuts, growth is especially accelerated.