If legislation required the budget to be balanced at all times, _____ as an automatic stabilizer of the business cycle.
A)fiscal policy could not operate
B)it would reduce the effectiveness of monetary policy
C)it would increase the effectiveness of discretionary fiscal policy
D)monetary policy could not operate

Question

Quizplus · Accepted Answer

If legislation required the budget to be balanced at all times, it would limit the government's ability to use fiscal policy as an automatic stabilizer during economic downturns. Fiscal policy involves government spending and taxation to stimulate or slow down the economy. During recessions, the government may increase spending and/or decrease taxes to boost consumer and business activity. However, this would lead to a budget deficit. Conversely, during a strong economy, the government may reduce spending and/or increase taxes to rein in inflation and prevent an overheating economy. This would lead to a budget surplus. If the budget always had to be balanced, there would be no allowance for creating budget deficits or surpluses, and hence fiscal policy would not be able to operate effectively as an automatic stabilizer.

If Legislation Required the Budget to Be Balanced at All