Question

During a recession, a government decides to use fiscal policy to provide incentives for companies to...

During a recession, a government decides to use fiscal policy to provide incentives for companies to increase production overseas, where labor and manufacturing costs are lower, and import these products into the domestic economy for sale. What is the effect of this government fiscal policy on the economy?

Select all that apply:

  • It will contribute to a recessionary gap.

  • It will contribute to an inflationary gap.

  • It will increase aggregate demand.

  • It will decrease aggregate demand.

  • It will have no effect.

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Homework Answers

Answer #1

It will increase aggregate demand.

Explanation :

During a recession, government decides to use expansionary fiscal policy to provide incentives for companies to increase production overseas where labor and manufacturing costs are lower, and import these products into the domestic economy for sale. The effect of this fiscal policy is that it lowers the rates of taxes and expands government spending thereby increasing aggregate demand, thus fuelling the growth of economy by increasing production and employment.

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