📚 Learning Guide
Recession and Fiscal Policy Actions
hard

Which fiscal policy action is most effective in closing a recessionary gap in the short run?

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Learning Path
Learning Path

Question & Answer
1
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2
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3
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4
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Choose the Best Answer

A

Increasing government spending

B

Raising interest rates

C

Cutting transfer payments

D

Increasing taxes

Understanding the Answer

Let's break down why this is correct

Answer

In a recessionary gap, the economy is not producing enough goods and services, leading to high unemployment and low demand. One effective fiscal policy action to close this gap is increasing government spending. When the government spends more money on projects like building roads or schools, it creates jobs and puts money into people’s hands, which encourages them to spend more. For example, if the government invests in a new highway, workers are hired to build it, and these workers will then use their earnings to buy food, clothes, and other goods. This increase in spending helps boost the economy and can quickly reduce the recession's effects.

Detailed Explanation

When the government spends more money, it creates jobs and boosts demand. Other options are incorrect because Raising interest rates makes borrowing more expensive; Cutting transfer payments means less money for people who need it.

Key Concepts

Recessionary gap
Fiscal policy actions
Aggregate demand
Topic

Recession and Fiscal Policy Actions

Difficulty

hard level question

Cognitive Level

understand

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