Answer to Question #249788 in Macroeconomics for Prisca Mahlalela

Question

Which of the following, are fiscal policy measures, that might be used to reduce a South African 

budget deficit? 

I. Increasing taxes.

II. Decreasing government spending.

III. Increasing interest rates.

A. I and II only.

B. II only.

C. I and III only.

D. I, II, and III.

Answer 1

Solution:

The correct answer is A. I and II only.

 

Increasing taxes and decreasing government spending fall under the contractionary fiscal policy.

The South African government can use contractionary fiscal policies such as raising taxes to increase tax revenues and reduce government spending to lower the national budget deficit.

 

On the other hand, increasing the interest rates will only worsen things and increase the budget deficit.