Answer to Question #131530 in Macroeconomics for Mcedisi

Question

Which one of the following statements regarding fiscal policy and the budget is
correct?
(2)
(a) When the government plans to stimulate economic activity, it can increase
spending or reduce taxes;
(b) Revenue from tax is always greater than government spending in South
Africa;
(c) Demand management only refers to fiscal policy;
(d) A contractionary fiscal policy should be implemented to combat
unemployment.

Answer 1

Answer: (a)

When the government plans to stimulate economic activity, it can increase spending or reduce taxes.

Explanation

By stimulating economic activity, the government will be aiming on increasing the gross domestic product (GDP). Policies at hand are therefore demand-side policies and supply-side policies. In this case, the government is choosing on expansionary fiscal policies. The government can therefore increase its spending, government spending (G), or it can reduce taxes so as to increase consumer disposable income and encourage spending. Both of these two tools increase the level of aggregate demand in the economy thereby stimulating investment. The level of economic activity thus increases, promoting high GDP or national income and a reduction in unemployment.