Fiscal Policy Analysis Indicates That Large Tax Increases During a Severe

question 50

Multiple Choice

Fiscal policy analysis indicates that large tax increases during a severe recession will result in

• A) an increase in the incentive to earn and the maintenance of a balanced federal budget.
• B) higher tax revenues and an expansion in government spending.
• C) smaller budget deficits, which will speed an economic recovery.
• D) a reduction in aggregate demand and a worsening of the recession.

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Definitions:

Equilibrium Price

The price point in the market where the amount of products available meets the amount of products consumers want to buy.

Demand

The quantity of a product or service that consumers are willing and able to purchase at various prices over a given period of time.

Allocative Efficiency

A state of the economy in which production represents consumer preferences; every good or service is produced up to the point where the last unit provides a marginal benefit equal to its marginal cost of production.

Productive Efficiency

A situation in which an economy or entity can no longer produce additional amounts of a good without lowering the production level of another product.