Reducing the level of government expenditure, while at the same time adopting a tight monetary policy to reduce inflation, proved to be difficult. Which of the following helps to explain why this was so?

Question

Quizplus · Accepted Answer

The deflationary monetary policy would lead to a slowdown in economic activity, which in turn would trigger automatic fiscal stabilizers such as increased government spending on unemployment benefits and reduced tax revenues. These stabilizers would counteract the government's efforts to reduce expenditure, making the policy difficult to implement.

Reducing the Level of Government Expenditure, While at the Same