📚 Learning Guide
Fiscal Policy in Recessions
hard

In the context of Keynesian economics, how does discretionary fiscal policy, specifically through taxation adjustments, aim to alleviate the effects of a recession?

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Choose the Best Answer

A

By increasing taxes to reduce inflation

B

By decreasing taxes to increase disposable income

C

By maintaining current tax levels to encourage savings

D

By implementing tariffs to protect domestic industries

Understanding the Answer

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Answer

In Keynesian economics, discretionary fiscal policy involves the government actively changing its spending and tax policies to influence the economy. During a recession, when people have less money to spend, the government can lower taxes to give individuals and businesses more disposable income. This extra money encourages people to spend, which can help boost demand for goods and services, leading to more jobs and economic activity. For example, if the government reduces income tax, families may have more cash to buy things like groceries or cars, which can help businesses recover. By increasing overall spending in this way, the government aims to reduce the severity of the recession and promote a quicker economic recovery.

Detailed Explanation

Decreasing taxes puts more money in people's pockets. Other options are incorrect because Some think raising taxes can help control prices; Keeping taxes the same might seem safe, but it doesn't help people who are struggling.

Key Concepts

taxation
discretionary fiscal policy
Keynesian economics
Topic

Fiscal Policy in Recessions

Difficulty

hard level question

Cognitive Level

understand

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