Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
By increasing taxes, which directly boosts consumption
B
By decreasing government spending, which encourages private sector investment
C
By increasing government spending, which generates a higher multiplier effect
D
By reducing transfer payments, which lowers overall economic activity
Understanding the Answer
Let's break down why this is correct
Answer
A government can increase economic output through fiscal policy by adjusting its spending and tax policies. When the government spends money on projects like building roads or schools, it directly creates jobs and boosts demand for materials, which can lead to more production in the economy. This is known as the spending multiplier effect, where each dollar spent can lead to more than one dollar of economic activity. Similarly, if the government lowers taxes, people have more money to spend, which increases consumption and also boosts economic output. For example, if a government cuts taxes by $100, people might spend $80 of that on goods and services, leading businesses to produce more and hire additional workers, ultimately increasing overall economic output.
Detailed Explanation
When the government spends more money, it creates jobs and boosts demand. Other options are incorrect because Some think that raising taxes helps people spend more, but it actually leaves them with less money; The idea here is that cutting government spending helps businesses invest, but it often leads to less overall spending.
Key Concepts
fiscal policy
multiplier calculations
economic output.
Topic
Spending and Tax Multipliers
Difficulty
hard level question
Cognitive Level
understand
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