Question 57

Increasing government spending is appropriate fiscal policy in a deep recession.

In times of deep recession, increasing government spending can stimulate economic activity, create jobs, and boost consumer confidence, thereby helping to recover from the downturn.

A) raise taxes

Raising taxes during a deep recession can exacerbate economic challenges by reducing disposable income for consumers and businesses. Higher taxes can lead to decreased spending and investment, further deepening the recession rather than stimulating growth.

B) cut spending

Cutting spending can have a deflationary effect in a recession, as it reduces overall demand in the economy. This approach is counterproductive during economic downturns when increased demand is necessary to spur recovery.

C) raise reserve ratio

Raising the reserve ratio requires banks to hold more capital in reserve, which limits their ability to lend. In a recession, this could restrict credit availability, hindering economic growth and recovery efforts, making it an unsuitable option.

D) increase government spending

Increasing government spending is a proactive measure that injects money into the economy, facilitates infrastructure projects, and creates jobs. This approach helps stimulate demand, encourages consumer spending, and can lead to a quicker recovery from a recession.

Conclusion

Increasing government spending is the most effective option during a deep recession as it directly addresses the need for economic stimulus and job creation. In contrast, raising taxes, cutting spending, or increasing the reserve ratio would likely worsen the economic situation by reducing demand and limiting financial resources. Thus, option D is the only choice that aligns with the goal of recovery during a recession.