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

Question

BlackTom AI · Accepted Answer

The question asks about an appropriate mix of policy tools during a recession, which typically calls for expansionary measures to boost demand and output.
Option content (as provided) indicates: decrease taxes, raise government spending, expand the money supply. This combination aligns with classic macroeconomic reasoning for recessionary gaps: fiscal expansion through tax relief stimulates private consumption and investment, while higher government spending directly boosts aggregate demand. In parallel, monetary expansion by expanding the money supply lowers interest rates and encourages borrowing and spending, reinforcing the fiscal stimulus.
Consider each component: 
- Decreasing taxes reduces households' and firms' after-tax income, potentially increasing consumption and investment if incentives and confidence are present; however, the magnitude depends on marginal propensities to consume and to invest. 
- Raising government spending directly injects demand into the economy, creating jobs, incomes, and ripple effects through the multiplier.
- Expanding the money supply lowers short-term interest rates, stimulates borrowing, and supports higher spending and investment, especially when confidence is fragile and credit conditions are tight.
Together, these tools form a coordinated expansionary policy package intended to shift the aggregate demand curve outward, reducing the recessionary output gap.
Now, with no other options to compare, it’s important to recognize potential caveats that might temper this approach: fiscal expansion increases the budget deficit and can raise concerns about debt sustainability if pursued persistently; monetary expansion can risk higher inflation if the economy overheats or if the transmission mechanism is weak; the timing of fiscal measures (lags) and monetary actions (policy transmission lags) matters for effectiveness; and there is always potential for crowding out if government spending competes for scarce funds and raises interest rates in the private sector. Nonetheless, in a typical recession with underutilized resources and low inflation, the stated mix of decreasing taxes, increasing government spending, and expanding the money supply is considered an expansionary policy package.
In the absence of competing options, this reasoning supports why the described combination would be viewed as appropriate for countering a recessionary environment.

BECO011 2025 Sample Final Exam for Practice

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

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