Multiple Choice
How would the U.S. government most likely respond to a slump in the economy using fiscal policy?
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19. Fiscal Policy
Introduction to Fiscal Policy
Multiple Choice
Suppose that the federal government wants to address high levels of unemployment in the economy using fiscal policy. Which of the following actions would be most appropriate?
A
Increase government spending on public projects
B
Decrease government purchases of goods and services
C
Reduce government transfer payments
D
Raise personal income taxes
Verified step by step guidance1
Step 1: Understand the goal of fiscal policy in this context, which is to reduce high levels of unemployment by stimulating economic activity.
Step 2: Recall that fiscal policy involves government decisions on spending and taxation to influence aggregate demand in the economy.
Step 3: Recognize that increasing government spending on public projects directly raises aggregate demand by injecting money into the economy, leading to higher production and employment.
Step 4: Contrast this with other options: decreasing government purchases or reducing transfer payments would lower aggregate demand, potentially increasing unemployment; raising personal income taxes reduces consumers' disposable income, also lowering aggregate demand.
Step 5: Conclude that the most appropriate fiscal policy action to reduce unemployment is to increase government spending on public projects, as it directly boosts demand and job creation.
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