Which of the following statement(s) about Fiscal Policy is/are true? A fiscal po

Question

Which of the following statement(s) about Fiscal Policy is/are true?

A fiscal policy action to close a recessionary gap is to decrease taxes

Fiscal Policy may require time before it takes effect (lags)

Expansionary fiscal policy can be achieved by increases in transfer payments and decreasing government purchases to pay for it.

One potential problem with using fiscal policy to close recessionary output gaps is that sustained government deficits can be harmful to long-run economic growth.

Fiscal Policy may affect potential output as well as potential spending.

The choices of government spending have little effect on fiscal policy since government spending is tied directly to the business cycle through Y=C+I+G+NX.

A fiscal policy action to close an expansionary gap is to decrease government purchases

Balanced budget fiscal policy is more effective than borrowing or re-paying government debt.

A fiscal policy action to close a recessionary gap is to decrease taxes

Fiscal Policy may require time before it takes effect (lags)

Expansionary fiscal policy can be achieved by increases in transfer payments and decreasing government purchases to pay for it.

One potential problem with using fiscal policy to close recessionary output gaps is that sustained government deficits can be harmful to long-run economic growth.

Fiscal Policy may affect potential output as well as potential spending.

The choices of government spending have little effect on fiscal policy since government spending is tied directly to the business cycle through Y=C+I+G+NX.

A fiscal policy action to close an expansionary gap is to decrease government purchases

Balanced budget fiscal policy is more effective than borrowing or re-paying government debt.

Explanation / Answer

Fiscal policy is the set of policy actions adopted by the government to correct for market failures. These include changing consumer demand using either taxes or government spending.

Out of the given options, the ones which are true are:

·         A fiscal policy action to close a recessionary gap is to decrease taxes (as it would increase consumer income and thus consumer spending)

·         Fiscal Policy may require time before it takes effect (lags) (it takes time for every policy action to show its effect. Nothing shows results immediately)

·         Fiscal Policy may affect potential output as well as potential spending. (as it directly targets consumer demand)

·         A fiscal policy action to close an expansionary gap is to decrease government purchases (as it would decrease consumer income and thus consumer spending)

·         Balanced budget fiscal policy is more effective than borrowing or re-paying government debt

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