The Canadian government decides to implement a fiscal policy involving a significant reduction in corporate income taxes and an increase in unemployment benefits. What is the most likely overall impact of these measures on the Canadian economy?

Question: The Canadian government decides to implement a fiscal policy involving a significant reduction in corporate income taxes and an increase in unemployment benefits. What is the most likely overall impact of these measures on the Canadian economy?

Answer options:

• A contractionary effect due to reduced government revenue.
• A strong inflationary pressure as both aggregate supply and demand increase simultaneously. ✅ An expansionary effect, stimulating both investment and consumption, potentially leading to mild inflation.
• A neutral effect, as the decreased corporate taxes offset the increased benefits.

Correct answer: An expansionary effect, stimulating both investment and consumption, potentially leading to mild inflation.

Explanation: Reducing corporate taxes encourages investment (boosting aggregate supply), while increased unemployment benefits boost consumption (boosting aggregate demand). Both are expansionary measures, potentially leading to economic growth and mild inflation.