To reduce the size of economic fluctuations, the government could
A)make fewer permanent changes in government spending.
B)change government purchases often to encourage a shift of the aggregate demand curve.
C)increase spending during a recession and decrease spending during an expansion.
D)keep government spending fixed to avoid shifting the aggregate demand curve.
E)continually increase government spending to shift the aggregate demand curve to the right.

Question

Quizplus · Accepted Answer

Increasing spending during a recession and decreasing spending during an expansion can help stabilize aggregate demand and reduce the size of economic fluctuations. This approach is known as discretionary fiscal policy and is one tool that the government can use to manage the economy. Making fewer permanent changes in government spending (A) could lead to less stability as the government may not be able to respond to economic shocks. Changing government purchases often (B) could create uncertainty for businesses and households and may not be effective in stabilizing the economy. Keeping government spending fixed (D) could lead to instability if economic conditions change. Continually increasing government spending (E) could lead to inflation and may not effectively stabilize the economy.

To Reduce the Size of Economic Fluctuations, the Government Could