Question

How could federal spending theoretically stimulate the economy?

Answer 1

The fourth alternative is correct (D).

Fiscal policy is an instrument for handling the economy in the hands of government and can be practiced in two ways: raising / lowering taxes or increasing / decreasing government spending.

If the economy is in recession and the country's fiscal system is in order, the government can increase its spending to stimulate the economy in one or more sectors.

Civil construction is one of the sectors that, when stimulated, generates a good response since it generates direct jobs and moves the construction industry. In this way, a suitable fiscal policy to stimulate the economy can be the construction of houses to house citizens affected by the recession.

It is important to point out that all public policy is a choice. There could be several other alternatives for the government to stimulate the economy via public spending.

Finally, it should be pointed out that the seductive alternative (A) is not a correct alternative since creating employment is not a fiscal policy, but a social one, and does not involve direct expenditure of government money.

Answer 2

The answer is creating jobs so that people would have money to spend.