Countercyclical Fiscal Policy: "Lean Against the Wind" Policy Explanation
What is the core strategy of policymakers following a "lean against the wind" policy?
a) Increase government expenditures when output is low and decrease them when output is high.
b) Decrease government expenditures when output is high and increase them when output is low.
c) Decrease government expenditures when output is high and do nothing when output is low.
d) Increase government expenditures when output is low and do nothing when output is high.
Answer:
Policymakers following a "lean against the wind" policy would decrease government expenditures when output is high and increase them when output is low.
The "lean against the wind" policy is based on the concept of countercyclical fiscal policy, which aims to stabilize the economy by taking actions that run counter to the direction of the business cycle. When the economy is in a boom phase with high output, policymakers reduce government expenditures to curb inflationary pressures and cool down the economy. This reduction in spending helps reduce overall demand for goods and services, thus alleviating inflation.
Conversely, in times of low output indicating a weak economy or a recession, policymakers increase government expenditures to stimulate demand and enhance economic activity. By injecting money into the economy through increased spending, jobs are created, and consumer spending is boosted, supporting economic growth and lifting the economy out of a downturn.
Therefore, policymakers following a "lean against the wind" policy would strategically decrease government expenditures when output is high and increase them when output is low to stabilize the economy by engaging in countercyclical fiscal policy.