Question

Economists are in general agreement that fiscal policy will stabilize the economy most when:___.

a. deficits are incurred during recessions and surpluses are incurred during booms
b. the budget is balanced each year
c. deficits are incurred during booms and surpluses are incurred during recessions
d. budget deficits are continually incurred

Answer 1

Economists agree that the best fiscal policy for stabilizing the economy involves incurring deficits during recessions and surpluses during booms, utilizing automatic stabilizers to moderate economic fluctuations (a).

Step-by-step explanation:

Economists are in general agreement that fiscal policy will stabilize the economy most effectively when deficits are incurred during recessions and surpluses are incurred during booms. This approach allows the use of automatic stabilizers, which naturally lead to larger budget deficits or smaller budget surpluses during economic downturns and smaller deficits or larger surpluses during economic upswings.

A balanced budget each year would prevent these stabilizers from functioning and exacerbate economic volatility. On the other hand, while temporary countercyclical policies are useful, they are less powerful than policies perceived as permanent.