Which combination of fiscal policy actions would be most stimulative for an exonomy in a deep recession?
a) increase taxes and government spending
b) decrease taxes and government spending
c) increase taxes and decrease government spending
d)decrease taxes and increase government spending
Stimulative policies are 1) reducing taxes, and/or 2) increasing govt spending.
In order to determine which combination of fiscal policy actions would be most stimulative for an economy in a deep recession, we need to understand how these actions affect the economy.
Option a) increase taxes and government spending: This combination involves higher taxes, which reduces the disposable income of individuals and businesses. It may lead to less spending and investment, which can restrain economic growth. However, increased government spending can potentially stimulate economic activity.
Option b) decrease taxes and government spending: This combination involves lower taxes, which increase the disposable income of individuals and businesses. This can encourage spending and investment, leading to economic growth. However, decreasing government spending may potentially reduce the overall demand and limit the stimulative effects.
Option c) increase taxes and decrease government spending: This combination involves higher taxes, which can reduce disposable income and potentially lower spending and investment. Simultaneously, reducing government spending may also reduce demand, counteracting any positive impacts of lower taxes.
Option d) decrease taxes and increase government spending: This combination involves lower taxes, which can increase disposable income and boost spending and investment. Increasing government spending can also provide additional stimulus by injecting money into the economy. This combination potentially provides a double boost to economic growth.
Based on these explanations, option d) decrease taxes and increase government spending would likely be the most stimulative combination for an economy in a deep recession. However, it is important to note that the specific circumstances and conditions of the economy need to be considered when implementing fiscal policies.