Question

Suppose the economy had been producing at potential output but is now experiencing a recession. Which of the following are discretionary fiscal policies that could bring the economy closer to potential output? CHECK ALL THAT APPLY.

A. A reduction in government purchases
B. Raising interest rates
C. A tax cut
D. Additional spending on national park facilities

Answer 1

C. A Tax Cut

Step-by-step explanation:

Discretionary Fiscal Policies are deliberate corrective policies taken by government to correct deviation (under / above production) from full employment level .

In case of recession i.e production below full employment level , policy makers will follow ' Expansionary Fiscal Policies ' i.e will reduce taxes & increase government spending (general - on national parks is irrelevant) .

Technically : AD = C + I + G + NX , where increase in 'G' will increase Aggregate Demand and help getting economy out of recession forces .