Question

Suppose the economy had been producing at potential output but is now experiencing a recession. Which of the following are discretionary fiscal policies that could bring the economy closer to potential output? Check all that apply. A reduction in government purchases A tax increase A tax cut Additional spending on national park facilities In the preceding scenario, is the discretionary fiscal policy needed to bring the economy closer to potential output an example of expansionary fiscal policy or contractionary fiscal policy? Expansionary Contractionary

Answer 1

Answer: a) -A tax cut

-Additional spending on national park facilities

b) Expansionary fiscal policy

Explanation:

Fiscal Policy refers to how the government of a country is using it's spending and taxes to influence Economic conditions on a Macro level.

The keywords for this question are TAXES and SPENDING.

The means that a Discretionary FISCAL policy includes Taxes and Spending.

Now the way to close the Recessionary gap that is opening is to put more money into the Economy. The Government can do this by REDUCING TAXES which will means people have more money to spend and ADDITIONAL SPENDING on NATIONAL PARK FACILITIES as this means that the government is pumping more money into the Economy.

The discretionary fiscal policy needed to bring the economy closer to potential output is an example of an EXPANSIONARY FISCAL POLICY.

This is where the Government aims to put more money into the economy so that growth can be acheived and they do this by lowering taxes and increasing spending either singularly or simultaneously.