Suppose the economy has been producing its potential, but it is now experiencing a recession. Which of the following is a discretionary fiscal policy that would bring the economy closer to its potential output? Check all that apply.
1) A tax cut
2) A tax increase
3) The sale of bonds by the Fed
4) An additional $10 billion in spending on agricutural subsidies
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In recession more money needs to be circulating
1) tax cut
2)spend on subsidies for farms
Tax increases and sale of bonds take cash out of circulation
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To determine which of the given options would be a discretionary fiscal policy that could bring the economy closer to its potential output during a recession, let's analyze each option:
1) A tax cut: This would involve reducing taxes on individuals and/or businesses. By doing so, people and businesses would have more disposable income, which could stimulate consumption and investment, thereby increasing aggregate demand and potentially bringing the economy closer to its potential output. Therefore, a tax cut could be an appropriate discretionary fiscal policy during a recession.
2) A tax increase: Increasing taxes during a recession could have the opposite effect of a tax cut. It would reduce disposable income, potentially leading to decreased consumption and investment, and could worsen the recession. Therefore, a tax increase is unlikely to be an appropriate discretionary fiscal policy for bringing the economy closer to its potential output during a recession.
3) The sale of bonds by the Fed: This action is related to monetary policy rather than fiscal policy. The sale of bonds by the central bank (Fed) is a contractionary monetary policy measure aimed at reducing the money supply to control inflation or slow down an overheating economy. It wouldn't directly help the economy recover from a recession or bring it closer to its potential output. Therefore, this option is not a discretionary fiscal policy.
4) An additional $10 billion in spending on agricultural subsidies: Increasing spending on agricultural subsidies involves government expenditure that can boost demand in the agricultural sector. This can have a positive impact on employment and potentially contribute to bringing the economy closer to its potential output. Hence, this option could be a discretionary fiscal policy in favor of economic recovery during a recession.
Based on the above analysis, the discretionary fiscal policies that could potentially bring the economy closer to its potential output during a recession are:
1) A tax cut
4) An additional $10 billion in spending on agricultural subsidies
Remember that these policies can have various effects depending on the specific context, so it's important to consider other factors and monitor the overall economic conditions before implementing any particular policy.