ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A government wants to reduce the severity of the business cycle and decides to raise public spending and cut taxes during a period of falling output. Which term best describes this approach?
This is expansionary fiscal policy. By raising government spending and cutting taxes, the government increases aggregate demand to counter falling output. Monetary policy uses interest rates and money supply, while supply-side and protectionist policies address productive capacity and trade respectively.
- AExpansionary fiscal policyCorrect
- BContractionary monetary policy
- CSupply-side policy
- DProtectionist trade policy
Explanation
Increasing government spending and cutting taxes to boost aggregate demand in a downturn is expansionary fiscal policy. Contractionary monetary policy would involve raising interest rates or restricting money supply. Supply-side policy targets productive capacity, and protectionism concerns trade barriers.
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