Chapter 12: Problem 5

Budget surpluses are most appropriate during (LO5) a) depressions b) recessions c) inflations

Short Answer

Expert verified

A budget surplus is most appropriate during inflations, as it can help to reduce the money supply in the economy and curb inflationary pressure. This is achieved by increasing taxes or reducing government spending, resulting in a cooling effect on the overheating economy.

Step by step solution

Identify the effects of a budget surplus during a depression

During a depression, the economy experiences a significant decline in economic activity, high unemployment rates, and reduced consumer expenditure. A budget surplus in this situation would imply that the government is collecting more taxes from the public, which would reduce the overall spending capacity further. This could exacerbate the depression by increasing unemployment rates and lowering overall demand in the economy.

Identify the effects of a budget surplus during a recession

During a recession, the economy experiences a decline in economic activity and growth, though not as severe as in a depression. A budget surplus might not be the best approach during a recession, as increased taxation or reduced government spending could further dampen economic activity. Instead, the government should focus on increasing spending and stimulus measures to boost overall demand and spur economic activity.

Identify the effects of a budget surplus during inflation

Inflation is an economic condition characterized by a general increase in the price level of goods and services, eroding the purchasing power of money. A budget surplus is more appropriate during inflation, as it would help to reduce the money supply in the economy, thereby curbing the inflationary pressure. By increasing taxes or reducing government spending, the government can achieve a cooling effect on the overheating economy.

Choose the correct answer

Based on our analysis of the effect of a budget surplus during each economic situation, we can determine that a budget surplus is most appropriate during inflation. Therefore, the correct answer is: c) inflations

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