📚 Learning Guide
Expansionary Fiscal and Monetary Policies
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During a recession, which combination of policies would most effectively stimulate economic activity?

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Choose the Best Answer

A

Increased government spending and lower interest rates

B

Higher taxes and increased interest rates

C

Decreased government spending and maintaining high interest rates

D

Increased taxes and decreased government spending

Understanding the Answer

Let's break down why this is correct

Answer

During a recession, the government and central bank can work together to boost the economy using expansionary fiscal and monetary policies. Expansionary fiscal policy involves increasing government spending or cutting taxes, which puts more money in people's hands and encourages them to spend. For example, if the government builds new roads, it creates jobs and allows workers to earn income that they will spend on goods and services. On the other hand, expansionary monetary policy involves lowering interest rates, making it cheaper for people and businesses to borrow money. When both policies are used together, they can effectively stimulate economic activity and help the economy recover more quickly.

Detailed Explanation

When the government spends more money, it creates jobs and helps businesses. Other options are incorrect because Higher taxes take money away from people and businesses; Cutting government spending means fewer jobs and services.

Key Concepts

Expansionary Fiscal Policy
Expansionary Monetary Policy
Aggregate Demand
Topic

Expansionary Fiscal and Monetary Policies

Difficulty

medium level question

Cognitive Level

understand

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