which combinations of fiscal policy actions would most likely be offsetting? A) increase taxes and government spending B) decrease taxes and increase government spending C) increase taxes, but make no change in government spending D) decrease taxes, but make no change in government spending
To determine which combinations of fiscal policy actions would be offsetting, we need to understand the impact of each action on the economy.
A) Increase taxes and government spending:
When taxes are increased, it reduces the disposable income of individuals and businesses, leading to reduced consumption and investment. However, when government spending is increased, it injects money into the economy, which can stimulate consumption and support economic growth. The potential effects of these actions can partially offset each other.
B) Decrease taxes and increase government spending:
When taxes are decreased, it puts more money in the hands of individuals and businesses, encouraging higher spending and investment. Additionally, increasing government spending can also stimulate economic activity. In this case, both actions work in the same direction, potentially enhancing their impact and leading to a stronger boost to the economy.
C) Increase taxes, but make no change in government spending:
Increasing taxes without a corresponding increase in government spending reduces the disposable income of individuals and businesses, leading to lower consumption and investment. Since there is no additional government spending to offset this reduction, it is likely to have a contractionary effect on the economy.
D) Decrease taxes, but make no change in government spending:
Decreasing taxes without a change in government spending puts more money in the hands of individuals and businesses, which can lead to higher consumption and investment. However, without any corresponding increase in government spending, the overall effect may be limited compared to the combination of decreasing taxes and increasing government spending.
Based on these explanations, it appears that the combination of B) decrease taxes and increase government spending is less likely to be offsetting and may have a larger impact on the economy.