Question

which of the following statements is correct? group of answer choices maintaining fiscal balance in a recession helps to stabilize the economy. automatic stabilizers refer to the fact that economic shocks are partly offset by households smoothing their consumption in the face of variable income. the multiplier on a fiscal stimulus is higher when the economy is functioning at full capacity. a fiscal stimulus can be implemented by raising spending to directly increase demand, or by cutting taxes to increase private sector demand.

Answer 1

The correct statement is that fiscal stimulus can involve increased government spending or tax cuts to boost private sector demand. Automatic stabilizers provide a partial and fast-acting buffer against economic fluctuations, while discretionary fiscal policy has its challenges and should be used cautiously. Therefore correct option is D

Step-by-step explanation:

The correct statement among the given options is that a fiscal stimulus can be implemented by raising spending to directly increase demand, or by cutting taxes to increase private sector demand. Automatic stabilizers are quick-response mechanisms that partly buffer the economy against fluctuations in aggregate demand. They do not fully neutralize economic shocks, but they offset about 10% of any initial movement in the level of output. During recessions, allowing these stabilizers to function will likely result in larger budget deficits, but they help to dampen the effects of the downturn. In contrast to automatic stabilizers, the effectiveness of discretionary fiscal policy, such as tax cuts or spending increases, can be uncertain due to implementation delays. Hence, it is used with caution.