With reference to fiscal policy, consider the following statements:
1. Counter-cyclical fiscal policy involves increasing public expenditure during an economic slowdown.
2. Procyclical fiscal policy tends to amplify the business cycle by increasing spending during booms.
3. Cutting the expenses during the recession is an example of Countercyclical fiscal policy.
Which of the statements given above is/are correct?
(a).1 and 2 only
(b). 2 and 3 only
(c). 1 only
(d). 1, 2 and 3
Explanation Countercyclical Fiscal Policy: A fiscal policy that works against the direction of the economic cycle increasing government spending or cutting taxes during a recession, and reducing spending or increasing taxes during a boom in order to stabilize the economy. Procyclical Fiscal Policy: A fiscal policy that moves in the same direction as the economic cycle cutting spending or raising taxes during a recession, and increasing spending or cutting taxes during a boom often exacerbating economic fluctuations.
Statement 1 is correct: Counter-cyclical fiscal policy stimulates the economy during a slowdown (e.g., through increased government spending or tax cuts).
Statement 2 is correct: Procyclical policy does the opposite, increasing spending during booms and cutting it in recessions, exacerbating economic fluctuations.
Statement 3 is not correct: Counter-cyclical policy increases government spending in a recession. Cutting expenditure during a downturn is procyclical, it worsens the recession.
Kutos:Economy Expert
Hello! I am a Economy expert. You can ask any question or request a detailed analysis related to this topic.
