Which is the MOST effective fiscal policy to fight a recession if people react to uncertainty by saving all additional money that they earn or receive?
A) a tax cut
B) a tax rebate
C) an increase in government spending
D) a do-nothing strategy that relies on automatic stabilizers

Question

Quizplus · Accepted Answer

If people are saving all additional income due to uncertainty, then a tax cut or tax rebate is unlikely to have a significant impact on stimulating consumption and boosting aggregate demand. In this case, increasing government spending can be the most effective option as it directly injects money into the economy and creates demand for goods and services, leading to increased economic activity and potentially boosting consumer confidence. Automatic stabilizers, such as unemployment benefits and social welfare programs, can also provide some support during a recession but may not be sufficient on their own if uncertainty is high.

Which Is the MOST Effective Fiscal Policy to Fight a Recession