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CMA Foundation · Fundamentals of Business Economics and Management · Economic and Business Environment

During a recession, which fiscal policy action would a government most likely adopt to stimulate the economy?

The government would reduce taxes and raise public expenditure. This expansionary fiscal policy increases disposable income and aggregate demand during a recession. Raising CRR or selling securities are contractionary monetary measures, and higher taxes with spending cuts would worsen the downturn.

  1. AIncrease income tax rates and cut public spending
  2. BReduce taxes and raise public expenditureCorrect
  3. CRaise the cash reserve ratio
  4. DReduce the money supply by selling securities

Explanation

Expansionary fiscal policy uses lower taxes and higher government spending to boost demand. Raising the CRR and selling securities are contractionary monetary tools, not fiscal ones, and higher taxes with lower spending would deepen the recession.

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