Correct Option (A):
Fiscal stimulus refers to a set of government policies implemented to boost aggregate demand in an economy, particularly during an economic recession or slowdown. The primary objective is to stimulate economic activity, employment, and consumption.
- Cutting tax rates: A reduction in tax rates, such as income tax or corporate tax, increases the disposable income of individuals and the profits of businesses. This encourages higher consumption and investment, thereby stimulating demand.
- Increasing government spending: Direct government expenditure on infrastructure projects, public services, or welfare programs injects money into the economy. This directly creates demand for goods and services, generates employment, and boosts economic activity.
- Abolishing subsidies: Subsidies are typically provided by the government to reduce the cost of certain goods or services for consumers or producers. Abolishing subsidies would likely lead to an increase in prices for these goods/services, which would reduce consumer purchasing power and potentially decrease demand. This action is generally considered contractionary rather than stimulatory.
Therefore, only actions 1 and 2 are components of a fiscal stimulus package.
Incorrect Options:
Option (B) is incorrect because it overlooks cutting tax rates, which is a fundamental tool of fiscal stimulus aimed at increasing disposable income and stimulating consumption.
Option (C) is incorrect as abolishing subsidies would likely lead to higher prices and reduced purchasing power, thereby contracting demand rather than stimulating it.
Option (D) is incorrect because it includes abolishing subsidies, an action that has a contractionary effect on the economy and is contrary to the objectives of a fiscal stimulus.