One Potential Problem with Using Fiscal Policy to Close Recessionary

question 72

Multiple Choice

One potential problem with using fiscal policy to close recessionary output gaps is that:

• A)sustained government deficits can be harmful to long-run economic growth.
• B)decreased government spending can cause inflationary pressure to build.
• C)reductions in interest rates can reduce savings and, therefore, investment.
• D)it may be offset by automatic stabilizers.

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Definitions:

Fixed Cost

Expenses that do not vary with the level of output or sales, such as rent, salaries, or insurance premiums.

Variable Cost

Expenses that vary in proportion to the volume of goods or services produced in a business.

Opportunity Cost

The forfeiture of potential benefits from other options by selecting a specific one.

Fixed Costs

Business expenses that remain constant regardless of the level of production or sales activities, such as rent, salaries, and insurance.