When consumers are very reluctant to spend in a recessionary environment, the government's most effective strategy is to:
A) increase spending through bond financing
B) decrease income taxes
C) decrease corporate taxes
D) do nothing, let self correct
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Although some conservatives might disagree, the most likely answer to this question is A.
There are many conservatives who might say that any of B, C, or D would be better than A. They might argue that a reduction in taxes would actually increase aggregate supply. As taxes were reduced, people and corporations would have more incentive to work hard and make more money. This would increase aggregate supply. As aggregate supply increased, prices would drop and output would rise. This would help the economy improve.
However, A is the most likely answer. D might work, but only in the long run. C would not generally help consumers and they would continue to be unlikely to spend. If consumers are not spending, businesses will not want to hire even if they get tax breaks. B might work, but it might also simply inspire people to save the money rather than spending it. A is the best because it automatically helps increase GDP. Simply by spending the money, the government increases GDP. Also, the increase in spending has a larger multiplier effect on the economy than decreasing taxes does. For these reasons, A is the best answer.
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