Which of the following statements about fiscal policy is the best description of "fine tuning"?
A)The government continuously alters its spending and taxing plans to hold real GDP at potential.
B)The government cuts taxes to remove a large and persistent recessionary gap.
C)The government increases its spending to reduce an inflationary gap.
D)The government decreases tax rates to decrease an inflationary gap.
E)The government uses automatic stabilizers to reduce any output gaps.

Question

Quizplus · Accepted Answer

"Fine tuning" refers to the continuous adjustment of government spending and taxation to keep the economy operating at or near its potential output. This involves making small changes to fiscal policy as needed to achieve economic stability and avoid recession or inflation. Option A best describes this concept. Options B, C, and D describe more dramatic policy interventions to address specific gaps or imbalances in the economy, while option E refers to the automatic stabilizers built into the tax and welfare system that help to cushion the impact of economic fluctuations.

Which of the Following Statements About Fiscal Policy Is the Best