Question

Which of the following statements best describes a situation when fiscal policy is more appropriate?

a) Inflation is high, and unemployment is low.
b) Inflation is low, and unemployment is high.
c) The economy is in a stable equilibrium.
d) Consumer spending is increasing rapidly.

Answer 1

Expansionary fiscal policy is most appropriate in a recession to stimulate output and decrease unemployment, while contractionary fiscal policy is most appropriate when an economy is producing above its potential GDP.

Step-by-step explanation:

Expansionary fiscal policy is most appropriate when an economy is in a recession and producing below its potential GDP. This policy involves increasing the level of aggregate demand through measures such as increasing government spending or reducing taxes.

By doing so, it helps stimulate output and decrease unemployment. In contrast, contractionary fiscal policy is most appropriate when an economy is producing above its potential GDP and aims to decrease the level of aggregate demand through measures like cutting government spending or increasing taxes.