Match each economic situation or fiscal policy concept on the left with its corresponding fiscal intervention or outcome on the right.
- Demand-pull inflationary gapImplementation of contractionary fiscal policy by raising direct taxes and cutting public expenditure
- Severe recessionary gapImplementation of expansionary fiscal policy through tax cuts and increased public works expenditure
- Automatic fiscal stabilizerAutonomous increase in government transfer payments and decline in tax revenues without new legislation
- Crowding-out effectGovernment deficit spending financed by domestic borrowing leading to higher interest rates and reduced private investment
Answer
Demand-pull inflationary gap matches with raising direct taxes and cutting expenditure; Severe recessionary gap matches with tax cuts and increased public spending; Automatic fiscal stabilizer matches with autonomous increase in transfer payments and tax decline without new legislation; Crowding-out effect matches with government borrowing raising interest rates and reducing private investment.
Each economic state or fiscal concept corresponds directly to its correct stabilization mechanism: contractionary fiscal policy addresses inflation, expansionary fiscal policy treats recessions, built-in stabilizers operate automatically without legislative delays, and crowding-out represents the interest rate trade-off of deficit borrowing.
Step-by-Step Solution
Key Concept
Fiscal Policy Tools and Economic Stabilization