Using fiscal policy, including automatic stabilizers, to stabilize output over a business cycle is not consistent with:
A) rational expectations.
B) inflation targeting.
C) the natural-rate hypothesis.
D) a strict balanced-budget rule.

Question

Quizplus · Accepted Answer

A strict balanced-budget rule would require fiscal policy to remain neutral and not be used to stabilize output over a business cycle. This is because a strict balanced-budget rule requires that government spending and revenue be equal at all times, regardless of economic conditions. This would prevent the use of discretionary fiscal policy, including automatic stabilizers, to influence the economy. The other options (rational expectations, inflation targeting, and the natural-rate hypothesis) are compatible with using fiscal policy to stabilize output.

Using Fiscal Policy, Including Automatic Stabilizers, to Stabilize Output Over