Question

How did the government help the economy?

The economy of country Y has experienced increased unemployment and reduced GDP for six months. The government therefore decides to implement fiscal policy that increases 1)_____ and reduces 2)_______.

1a) government spending
1b) prices
1c) taxes

2a) government spending
2b) prices
2c) taxes

Answer 1

1a) government spending

2c) taxes

Step-by-step explanation:

Fiscal policy is an instrument that the government has to stimulate or discourage economic activity. When the economy is inflated and overheated (high GDP and low unemployment), the government adopts a contractionary fiscal policy, reducing spending and raising taxes. On the contrary, when the economy is low growth and high unemployment, the government adopts an expansionary fiscal policy, which consists of increasing public spending and lowering taxes. Thus, the government expects demand to warm up by increasing household consumption and public spending. This will cause GDP to rise and companies to hire.