Which one of the following is an example of discretionary fiscal policy used to correct a recessionary gap?
A) a tax decrease passed into law by Congress
B) an increase in the money supply by the Federal Reserve
C) a decrease in government expenditures approved by Congress
D) an agreement among major banks to raise interest rates

Question

Quizplus · Accepted Answer

A tax decrease passed into law by Congress is an example of discretionary fiscal policy used to correct a recessionary gap. This is because a tax decrease would lead to an increase in disposable income and consumption, which would stimulate aggregate demand and help to close the recessionary gap. B is incorrect because an increase in the money supply by the Federal Reserve is an example of monetary policy, not fiscal policy. C is incorrect because a decrease in government expenditures would only exacerbate a recessionary gap by reducing aggregate demand. D is incorrect because an agreement among major banks to raise interest rates is an example of monetary policy, not fiscal policy.

Which One of the Following Is an Example of Discretionary