Chapter 15: Problem 34

The conventional fiscal policy to fight a recession would be to (LO9) a) increase the rate of monetary growth b) decrease the rate of monetary growth c) run budget deficits d) run budget surpluses

Short Answer

Expert verified

The conventional fiscal policy to fight a recession (LO9) is to: c) run budget deficits

Step by step solution

Reviewing fiscal policy

Fiscal policy is the use of government revenue collection (taxes) and expenditure (spending) to influence the economy. Fiscal policy is usually implemented to stabilize the economy and avoid significant fluctuations, such as inflation or recession. During a recession, the primary aim of fiscal policy is to stimulate economic growth and reduce unemployment.

Option A: Increase the rate of monetary growth

Increasing the rate of monetary growth refers to increasing the money supply in the economy. This is an action associated with monetary policy, not fiscal policy. Monetary policy is managed by the central bank and is a separate method for managing the economy. Therefore, option A is not the correct application of fiscal policy.

Option B: Decrease the rate of monetary growth

Decreasing the rate of monetary growth is also an action related to monetary policy and not fiscal policy. This method aimed at slowing down inflation or an overheated economy, which is not our focus during a recession. Hence, option B is not the correct application of fiscal policy.

Option C: Run budget deficits

Running budget deficits means that the government spends more than it collects in revenue (taxes). This option can be considered a conventional fiscal policy during a recession. In such situations, governments may choose to increase spending or reduce taxes to stimulate the economy, even if it results in a temporary budget deficit. This approach helps increase demand in the economy, leading to businesses creating more jobs, and ultimately promoting growth.

Option D: Run budget surpluses

Running budget surpluses is when the government spends less than it collects in revenue (taxes). This action is not commonly used to fight a recession as it may further reduce demand and economic activity, which could deepen the recession instead of alleviating it.

Conclusion

Based on the analysis of the given options, we can conclude that the conventional fiscal policy to fight a recession (LO9) is to: c) run budget deficits

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