CA Foundation · Business Economics · Business Cycles
During a recession, which of the following policy responses is most consistent with a counter-cyclical fiscal policy?
Increasing public spending on infrastructure and lowering taxes is the counter-cyclical fiscal response to a recession, because it boosts aggregate demand, output and employment. Raising taxes or cutting spending would worsen the downturn, while CRR changes are monetary policy and quotas are trade policy.
- ARaising tax rates and cutting government expenditure to reduce the deficit
- BIncreasing public spending on infrastructure and lowering taxesCorrect
- CIncreasing the cash reserve ratio to absorb liquidity
- DImposing import quotas to reduce the trade deficit
Explanation
Counter-cyclical fiscal policy raises aggregate demand in a slump through higher government spending and lower taxes. Raising taxes and cutting spending would deepen the recession. A higher CRR is a monetary tightening measure, and import quotas are trade policy.
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