Question

If the government is required to balance the budget and the economy falls into a recession, which of the actions is a feasible policy response? cut taxes to encourage consumer spending invest in infrastructure increase government spending to stimulate the economy cut spending equal to the reduction in tax revenue What is a likely consequence of this policy? Unemployment falls due to the economic stimulus. The negative consequences of the recession are magnified. Consumer spending increases due to their ability to keep more of their after-tax income. There is hyperinflation due to an increase in aggregate demand.

Answer 1

The correct answer is: cut spending equal to the reduction in tax revenue.

Step-by-step explanation:

Answer 2

The correct answer is: cut spending equal to the reduction in tax revenue.

The correct answer is: The negative consequences of the recession are magnified.

Step-by-step explanation:

Recession is likely to cause a reduction in the aggregate demand, consumer income, and spending will decrease as well. As a result, the tax revenue to the government will fall as well.

A balanced budget means that government expenditures should be equal to revenue. So if the government wants to have a balanced budget it needs to reduce its spending by the same amount as the reduction in the tax earnings.

This will lead to a reduction in the aggregate demand further magnifying the effects of the recession.