3 Aspects of fiscal policy Suppose the economy had been prod

3. Aspects of fiscal policy

Suppose the economy had been producing at Natural Real GDP but is now experiencing a recession. Which of the following are discretionary fiscal policies that could bring the economy closer to Natural Real GDP? Check all that apply.

A tax hike

Additional spending on national park facilities

A tax cut

A reduction in government purchases

In the preceding scenario, is the discretionary fiscal policy needed to bring the economy closer to Natural Real GDP an example of expansionary fiscal policy or contractionary fiscal policy?

Contractionary

Expansionary

Solution

?In a recessionary situation there is lack of aggregate demand so the government increase the aggregate demand in the economy. The above given is the discretionary fiscal policies that tend to increase in the aggregate demand in the economy.

A tax cut will increase the disposable income of the country, so now the people got more money to spend so there should be an increase in the spending and this inturn increases the aggregate demand in the economy.

The public spending also increase the cash holdings of people so this increases the aggregate demand so this will help the economy to move towards the natural level of GDP.

These policies clear cut examples of expansionary fiscal policies.