Macroeconomics: Government Budget and the Economy · Class 12 · CBSE · Commerce Economics
How can the government budget help maintain economic stability during a recession?
Practice question from Macroeconomics: Government Budget and the Economy (Class 12 · CBSE · Commerce Economics), with the correct answer and a step-by-step solution.
medium · Subjective · Q-FD8531
How can the government budget help maintain economic stability during a recession?
Answer: During a recession, the government can increase public expenditure and reduce taxes to raise aggregate demand, output and employment. This expansionary fiscal policy helps utilise idle resources and stabilise economic activity. During inflation, the government can adopt the opposite measures by reducing expenditure or increasing taxes.
Solution
Expansionary fiscal policy increases aggregate demand during a recession through higher government spending or lower taxation. Contractionary fiscal policy can help control inflation by reducing demand.
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