Question

Discretionary fiscal policy will likely cause budget Multiple Choice surpluses during recessions and deficits during periods...

Discretionary fiscal policy will likely cause budget

Multiple Choice

  • surpluses during recessions and deficits during periods of demand-pull inflation.

  • deficits during recessions and surpluses during periods of demand-pull inflation.

  • surpluses during both recessions and periods of demand-pull inflation.

  • deficits during both recessions and periods of demand-pull inflation.

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Answer #1

If an economy is in recession, the discretionary fiscal policy can reduce taxes and increase government spending. This causes budget deficit.

To counter demand pull inflation, governments, and central banks would have to implement a tight fiscal policy. Hence here taxes would rise and government expenditure would fall, thus creating a budget surplus.

The correct option is therefore,

deficits during recessions and surpluses during periods of demand-pull inflation.

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