Question

During a period of grave financial crisis in the United States, Congress is pressurized to raise the limit on the maximum amount of money the government can borrow. Congress increases the limit on the condition that it will implement sharp tax hikes and across-the-board spending cuts to compensate for the raise and to ensure that the overall budget deficit decreases. In this scenario, the measures implemented by Congress will most likely create _________

Answer 1

Answer:

In this scenario, the measures implemented by Congress will most likely create the fiscal cliff.

Explanation:

In managing an economy, agencies always try to find a balance between growth and inflation. In general, individuals always want a situation where there is economic growth, however if the growth is not controlled it can lead to cases of inflation where the prices of goods and services are too high. There are two major ways in which the economy can be brought to a balance, namely; fiscal policy and monetary policy. Fiscal policy deals with the use of incentive and laws by the government to control the economy. The incentives include; adjusting government expenditure and the taxes. On the contrary, monetary policy is utilized by the monetary authority to regulate the supply of money to the economy.

A fiscal cliff is the use of a combination of tax hikes and cutting expenditure across the board by government agencies to cause severe economic decline.The fiscal cliff was a concept that was to be effected in December of 2012, however, there was concern that using the two combinations might drive the economy which was already shaky to a detrimental end. On the other hand, predictions showed that going through with the idea would reduce the budget deficit considerably.