Question

If the government is required to balance the budget and the economy falls into a recession, which of the actions is a feasible policy response?

a. invest in infrastructure
b. increase government spending to stimulate the economy
c. cut taxes to encourage consumer spending
d. cut spending equal to the reduction in tax revenue

Answer 1

d. cut spending equal to the reduction in tax revenue

Step-by-step explanation:

Recession is basically a period of temporary economic decline where people usually buy less and less trade happens. When this happens, the government loses TAX revenue (money coming in from taxes) so a good way for govt. to balance the budget (amount that govt needs for spending on different areas) is to cut spending equal to the reduction in tax revenue (the reduction came about due to recession)

In other words, reduce spending by x dollars (here x dollar represents the lost tax revenue.