95. Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

A. a tax increase and an increase in the money supply
B. a tax reduction and an increase in the money supply
C. a reduction in government expenditures and a decline in the money supply
D. a tax increase and an increase in the interest rate

Question

95. Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

A. a tax increase and an increase in the money supply
B. a tax reduction and an increase in the money supply
C. a reduction in government expenditures and a decline in the money supply
D. a tax increase and an increase in the interest rate

BlackTom AI · Accepted Answer

The question asks us to identify which policy pair is not consistent for shifting aggregate demand (AD) either up (expansion) or down (contraction).
Option A: a tax increase (contractionary fiscal policy) paired with an increase in the money supply (expansionary monetary policy).
Here, one component would reduce AD (tax increase) while the other would raise AD (money supply increase). Since the two instruments pull in opposite directions, this pairing is not consistent in achieving a unified AD goal.
Option B: a tax reduction (expansionary fiscal policy) paired with an increase in the money supply (expansionary monetary policy).
Both instruments promote higher aggregate demand—tax cuts boost C and possibly investment, while more money in the economy lowers interest rates and stimulates spending and investment. The combination is consistent in its intention to expand AD.
Option C: a reduction in government expenditures (contractionary fiscal policy) paired with a decline in the money supply (contractionary monetary policy).
Both actions dampen AD: cutting government spending directly reduces demand, and a shrinking money supply tends to raise interest rates and reduce spending and investment. This pairing is consistent with a contraction of AD.
Option D: a tax increase (contractionary) and an increase in the interest rate (contractionary monetary stance).
Raising taxes reduces disposable income and spending, while higher interest rates discourage borrowing and investment. Together, they reinforce a decline in AD. This pair is also consistent with contractionary policy.
In summary, Option A mixes opposite policy directions (contractionary fiscal with expansionary monetary), making it the not-consistent pairing among the options; the others align in their intended effect on aggregate demand.

ECNM1115.32542.202530 Macroeconomics Spring 2025 Final

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ECNM1115.32542.202530 Macroeconomics Spring 2025 Final

View Explanation

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