. If the economy is prosperous and inflation is relatively high, then the discre

Question

. If the economy is prosperous and inflation is relatively high, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be:
A. Increased government spending or increased taxation, or a combination of the two actions
B. Increased government spending or decreased taxation, or a combination of the two actions
C. Increased government spending or increased taxation, but not a combination of the two actions
D. Decreased government spending or increased taxation, or a combination of the two actions

Explanation / Answer

D. Decreased government spending or increased taxation, or a combination of the two actions

This is so because in contractionary fiscal policy is usually used to counter the macroeconomic condition when the growth in the economy is high and is fueled by rapid inflation, which is the case here as we see. In this case both the GDP and the inflation are high. So there is a requirement of the contractionary policy in order to reduce the agggregate demand and in turn the inflation.

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