The South African economy is in the middle of a recession. As a result, the government as part of expansionary fiscal policy will:
a) decrease the money supply.
b) decrease taxation.
c) decrease government expenditure.
d) decrease the Repo rate.
e) decrease the required reserve ratio
The correct answer and explanation is:
The correct answer is b) decrease taxation.
Explanation:
In the context of a recession, the government typically adopts expansionary fiscal policy to stimulate economic activity and drive growth. One of the key tools for expansionary fiscal policy is reducing taxation. By lowering taxes, consumers and businesses have more disposable income. This increased income can lead to higher consumer spending and investment by businesses, both of which can help to increase aggregate demand and overall economic activity.
The goal of expansionary fiscal policy is to inject more money into the economy, thereby encouraging higher demand for goods and services. When taxes are reduced, households and firms are able to spend more, leading to a multiplier effect where increased spending results in higher output and potentially job creation. This can help reduce the economic contraction associated with a recession.
In contrast, the other options listed do not directly align with the goals of expansionary fiscal policy:
- a) Decrease the money supply would be a contractionary measure, which seeks to reduce inflation but would not help during a recession.
- c) Decrease government expenditure would also be a contractionary policy as it reduces government spending, which can worsen a recession by limiting demand.
- d) Decrease the Repo rate refers to a monetary policy action rather than fiscal policy. It involves the central bank reducing interest rates to stimulate borrowing and investment.
- e) Decrease the required reserve ratio is also a monetary policy tool that affects banks’ lending capacity, rather than fiscal policy.
Thus, reducing taxes is the most effective expansionary fiscal policy measure for combating a recession, as it directly stimulates economic demand.