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

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BlackTom AI · Accepted Answer

To analyze the question, begin by recalling the objective during a recession: stimulate aggregate demand to boost output and employment. Now examine each option in light of expansionary vs. contractionary policy.
Option 1: decrease taxes, raise government spending, expand the money supply. This combination clearly aims to stimulate demand: lower taxes leave households and firms with more after-tax income to spend or invest; higher government spending directly increases aggregate demand via fiscal stimulus; expanding the money supply lowers interest rates and encourages borrowing and spending. Together, these actions are expansionary on both fiscal and monetary fronts, which is appropriate in a recession.
Option 2: increase taxes, lower government spending, expand the money supply. Increasing taxes and cutting government spending are contractionary fiscal measures; even though the money supply is expanding, the net fiscal stance would be dampening demand, which is undesirable in a recession. The combination tends to reduce aggregate demand rather than raise it.
Option 3: increase taxes, raise government spending, expand the money supply. Here the fiscal components are mixed: higher taxes reduce disposable income, while increased government spending adds some stimulus. The net effect of these two fiscal actions is uncertain and generally leans toward a smaller or ambiguous stimulus depending on multiplier sizes; when paired with an expansionary monetary stance, the overall impact is not as clear-cut and often considered insufficiently expansionary for a recession.
Option 4: decrease taxes, lower government spending, contract the money supply. This set clearly pursues contractionary fiscal policy (lower taxes is actually expansionary, but lower government spending is contractionary) and a contractionary monetary policy (tightening money supply). The combination is aimed at slowing the economy, which is counterproductive during a recession.
In summary, the first option uniquely couples multiple expansionary tools across fiscal and monetary policy, aligning with the goal of stimulating demand in a recession, while the other options mix policies in ways that would either dampen demand or introduce ambiguity about the overall impact.

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

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