Question

Suppose the government cuts taxes to keep the economy's cyclically-adjusted budget in balance when the economy is expanding. The government is engaging in a(n):_____________.

A. contractionary fiscal policy.
B. expansionary fiscal policy.
C. low-interest rate policy.
D.neutral fiscal policy

Answer 1

Answer:

B.expansionary fiscal policy

Explanation:

In expansionary fiscal policy, government fight recessionary pressures by lowering  tax rates or increasing government expenditure or applying both i.e. lowering tax rate and increasing government expenditure.

A lower tax rate increase the household income and more household income means increase in  the consumption of the household. more consumption increases Gross Domestic Product (GDP).

Also the lower tax rate gives the confidence to the investors to invest in the country and hence help the economy to revive.

Based on above discussion, answer shall be B.expansionary fiscal policy