Question

How would a government most likely respond to a slowdown in the economy?
A. Decreasing spending in order to grow the economy
B. Lowering taxes in order to stimulate spending
C. Raising taxes in order to adjust to the new circumstances
D. Raising interest rates in order to discourage borrowing

Answer 1

B. Lowering taxes in order to stimulate spending. When the economy experiences a downturn, the government is more likely to cut taxes to allow price competitiveness of goods, thereby triggering demand, hence consumption among households. A boost in consumption should translate into an increase in supply that wwould in turn bring about job creation. The negative trend would therefore be reversed.

Answer 2

A slowdown in economy is usually due to the limited spending. Cash outflow tends to decrease when there are high taxes. The government may effectively increase cash flow by reducing the prices of products and services by reducing taxes. Therefore, the answer is B. lowering taxes in order to stimulate spending.