Multiple Choice
Suppose that the federal government wants to address high levels of unemployment in the economy using fiscal policy. Which of the following actions would be most appropriate?
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20. Fiscal Policy
Introduction to Fiscal Policy
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Smoothing the peaks and troughs of the business cycle with fiscal policy is known as:
A
procyclical fiscal policy
B
monetary targeting
C
countercyclical fiscal policy
D
automatic stabilizers
Verified step by step guidance1
Step 1: Understand the concept of fiscal policy, which involves government decisions on taxation and spending to influence the economy.
Step 2: Recognize that the business cycle consists of periods of economic expansions (peaks) and contractions (troughs).
Step 3: Define procyclical fiscal policy as government actions that amplify economic fluctuations, meaning spending more during booms and cutting back during recessions.
Step 4: Define countercyclical fiscal policy as government actions aimed at reducing the severity of economic fluctuations by increasing spending or cutting taxes during recessions and reducing spending or increasing taxes during booms.
Step 5: Identify that smoothing the peaks and troughs of the business cycle refers to countercyclical fiscal policy, which acts as a stabilizer to moderate economic volatility.
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