Discretionary ﬁscal policy will stabilize the economy most when
A) deﬁcits are incurred during recessions and surpluses during inﬂations.
B) the budget is balanced each year.
C) deﬁcits are incurred during inﬂations and surpluses during recessions.
D) budget surpluses are continuously incurred.

Question

Quizplus · Accepted Answer

Discretionary fiscal policy involves government spending and taxation decisions aimed at stabilizing the economy. In order to be most effective, deficits should be incurred during recessions when the economy needs stimulation, and surpluses should be incurred during inflationary periods when the economy needs to cool down. Therefore, option A is the best choice. Option B is not a good choice as a balanced budget may not provide sufficient stimulus during a recession or enough restraint during an inflationary period. Option C is also incorrect as deficits during inflation would add further fuel to the already overheating economy. Option D is also not optimal as continuously incurred surpluses may lead to deflationary pressure and hinder economic growth.

Discretionary ﬁScal Policy Will Stabilize the Economy Most When