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 spending on education A tax increase Additional spending on national park facilities A tax cut

Answer 1

Answer:

Options one and two are correct.

Explanation:

Discretionary fiscal policies are understood as how the government spends its taxes and how this behavior can change to shrink or expand the economy. In the question, it is necessary to shrink the economy due to the recession: additional spending and tax cut are not reliable options because the government needs money and these two options reduce the incomes. On the other hand A and B do the opposite by generating more incomes (tax increase) and by not spending as much as before (reduction in spending on education).