Chapter 30, Problem 4MCQ

To determine

The correct option regarding the impact of recession on tax revenues and government spending. \

Explanation of Solution

For a number of causes, private sector expenditure declines during a recession. Products and services are less in demand. Private investors typically have rigorous investing guidelines. Factories frequently reduce production and lay off staff. As people's disposable income declines, more and more companies will ultimately have to make more layoffs. Government, state, and municipal tax revenues will all decrease. Taxes, which represent a share of both individual and corporate incomes, often provide these resources, hence the decrease in tax revenue will occur. 

Spending is necessary to stop the deteriorating trend. We will require somebody else to revive the market during a recession if the struggling private sector is unable to supply adequate expenditure. The recommendation of economists is to increase government spending without raising taxes. One of the rare situations where economists may defend deficit spending is a recession.

Thus, from the above we can conclude that the correct option is D.