Question

Which of the following is an example of contractionary discretionary fiscal policy?

Group of answer choices

a- A new law that decreases the amount of food stamps recipients receive.

b- A new law that decreases the income tax rates paid by top income earners.

c- Open market sale of treasury bills.

d- Decrease in unemployment benefits that arises from lower unemployment.

Answer 1

The correct example of contractionary discretionary fiscal policy is a new law that decreases the amount of food stamps recipients receive, which would reduce government spending and decrease aggregate demand.

Step-by-step explanation:

An example of contractionary discretionary fiscal policy would be a new law that decreases the amount of food stamps recipients receive, as provided in answer choice "a." This action would reduce the government's spending and would likely lead to a decrease in aggregate demand, which is the intended effect of contractionary policy.

This type of policy is used to cool down an overheated economy and combat inflation. It is different from other measures such as reducing income tax rates for top income earners or selling treasury bills, as these do not involve direct government spending changes.

Discretionary fiscal policy involves the government making intentional changes to its spending and taxes. In contrast, automatic stabilizers like unemployment insurance and food stamps automatically adjust with economic conditions without specific legislative action.

During economic downturns, such as the recession of 2008-2009 or the impact of COVID-19 in 2020, expansionary fiscal policy would typically be more appropriate to stimulate aggregate demand and boost the economy.