If the economy is in a recession, an appropriate combination of monetary and fiscal policies might be to:

Question

BlackTom AI · Accepted Answer

To analyze the question, we consider what happens in a recession and how policy tools respond to it. Each option reflects a different mix of fiscal and monetary actions, with varying implications for aggregate demand.
Option 1: 'increase taxes, raise government spending, expand the money supply' This mixes expansionary fiscal policy (raise government spending is expansionary) with contractionary fiscal policy (increase taxes is contractionary). The net effect depends on the relative sizes, but increasing taxes generally dampens consumption and investment, which is counterproductive in a recession. While 'expand the money supply' is expansionary, the simultaneous tax increase muddies the overall policy stance and may reduce the effectiveness of the stimulus.
Option 2: 'decrease taxes, lower government spending, contract the money supply' This combination is a mismatched mix: tax cuts are expansionary, but lowering government spending is contractionary, and contracting the money supply is also contractionary. In a recession, you want to stimulate demand, not pull it back, so this trio would likely deepen the downturn rather than alleviate it.
Option 3: 'increase taxes, lower government spending, expand the money supply' Here, tax increases and spending cuts are both contractionary fiscal moves, which would reduce aggregate demand. Although expanding the money supply is an expansionary monetary move, the two contractionary fiscal measures would dominate, making this option largely inappropriate for alleviating recessionary pressures.
Option 4: 'decrease taxes, raise government spending, expand the money supply' This is the classic expansionary policy mix: tax cuts spur consumption and investment, higher government spending directly increases aggregate demand, and an expanded money supply lowers interest rates and encourages borrowing and spending. Taken together, these actions aim to stimulate the economy, reduce unemployment, and boost output during a recession.
In summary, the combination in Option 4 aligns with standard macroeconomic prescriptions for recession: expansionary fiscal policy (lower taxes and higher spending) complemented by expansionary monetary policy (increasing the money supply) to shift the economy toward higher demand and output.

If the economy is in a recession, an appropriate combination of monetary and fiscal policies might be to:

View Explanation

Log in for full answers

Similar Questions

In 2003, government passed a substantial cut in income taxes. The central bank also lowered interest rates. How can these two actions be categorized?

A goal of monetary policy and fiscal policy is to[Fill in the blank]