ECONOMICS
FISCAL POLICY
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
It can cause inflation.
|
|
|
It could lower taxes.
|
|
|
It could create a recession.
|
|
|
It could raise aggregate demand too much.
|
Detailed explanation-1: -Contractionary monetary policy can lead to increased unemployment and decreased borrowing and spending by consumers and businesses, which can eventually lead to an economic recession if too aggressively applied.
Detailed explanation-2: -Under contractionary fiscal policies, the economy usually grows by no more than 3% per year. Above this growth rate, negative economic consequences – such as inflation, asset bubbles, increased unemployment and even recessions – may occur.
Detailed explanation-3: -Contractionary Monetary Policy Graph The decrease in consumption spending by consumers and in investment spending by businesses decreases the overall demand for goods and services in the economy. With decreased production, businesses are less likely to hire additional employees and spend more on other resources.
Detailed explanation-4: -There are two possible reasons why monetary policy may be less effective at persistently low rates: (i) headwinds resulting from the economic context; and (ii) inherent nonlinearities linked to the level of interest rates.