The economy is in a recession and the recessionary gap is large. Describe the discretionary and...

The economy is in a recession and the recessionary gap is large. Describe the discretionary and automatic fiscal policy actions that might occur. Discretionary fiscal policy that might occur is ______. Automatic fiscal policy that might occur is ______.

A. a decrease in transfer payments and an increase in taxes with no interference by Parliament; a decrease in government expenditure and an increase in taxes by a decision of Parliament
B. a decrease in government expenditure and an increase in taxes by a decision of Parliament; a decrease in transfer payments and an increase in taxes with no interference by Parliament
C. an increase in transfer payments and a fall in taxes with no interference by Parliament; an increase in government expenditure and a cut in taxes by a decision of Parliament
D. an increase in government expenditure and a cut in taxes by a decision of Parliament; an increase in transfer payments and a fall in taxes

Solutions

Expert Solution

The correct answer is Option (D) An increase in government expenditure and a cut in taxes by a decision of Parliament; an increase in transfer payments and a fall in taxes

Explanation - Option (a) and (b) are incorrect because when there is a recessionary gap, government spending increases and tax rate decline as a part of expansionary fiscal policy.

Further, Discretionary fiscal policy is one that is enacted by the government after considering the recession or unemployment situation. It is by the decision of the Parliament.

On the other hand, Automatic fiscal policy is through automatic adjustments and does not need discussion or approval in the Parliament.

Therefore, the correct option is (D) because an increase in government expenditure and a cut in taxes by a decision of Parliament is Discretionary fiscal policy. Further, an increase in transfer payments and a fall in taxes is Automatic fiscal policy.

Both are intended to stimulate consumption and job creation in the economy to close the recessionary gap.

Rahul Sunny answered 1 year ago

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