Question 3

Expansionary fiscal policy to fight recession involves decreasing taxes and increasing spending.

Expansionary fiscal policy to combat a recession typically entails lowering taxes and increasing government spending to stimulate economic activity. This approach aims to boost aggregate demand, encouraging consumer spending and investment.

A) ↑ taxes ↑ spending

This option suggests that both taxes and spending are decreased, which is not aligned with the goals of expansionary fiscal policy. Lowering taxes alone without increasing spending would not effectively stimulate the economy during a recession.

B) ↓ taxes ↑ spending

This option correctly identifies the two primary components of expansionary fiscal policy: decreasing taxes and increasing government spending. Lowering taxes provides individuals and businesses with more disposable income, while increased spending injects money directly into the economy, both of which are essential in combating a recession.

C) ↑ taxes ↓ spending

This choice indicates a decrease in taxes and a decrease in spending, which contradicts the principles of expansionary fiscal policy. Such a combination would likely exacerbate a recession by reducing overall economic activity.

D) ↓ spending ↑ taxes

This option suggests increasing spending while also decreasing taxes, which aligns partially with expansionary fiscal policy. However, the phrasing is misleading as it does not clearly state both components working together to stimulate the economy, making it less clear than option B.

Conclusion

Option B is definitively correct as it accurately reflects the dual approach of decreasing taxes and increasing spending that characterizes expansionary fiscal policy. Other options either misrepresent the policy's intent or fail to capture the essential elements needed to stimulate the economy during a recession.