During a recession, if a government uses an expansionary fiscal policy to increase GDP, the:

• A. government implements policies to decrease the money supply.
• B. government increases spending or decreases taxes to boost aggregate demand.
• C. central bank raises interest rates to encourage saving.
• D. government reduces spending and increases taxes to lower aggregate demand.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the context of the problem, which is a recession—a period of declining economic activity and falling GDP.
2. Step 2: Recall that expansionary fiscal policy aims to increase aggregate demand to stimulate economic growth during a recession.
3. Step 3: Identify the tools of expansionary fiscal policy, which include increasing government spending and/or decreasing taxes to put more money into consumers' hands.
4. Step 4: Recognize that increasing government spending directly raises aggregate demand by increasing overall expenditure in the economy.
5. Step 5: Understand that decreasing taxes increases disposable income for households, encouraging higher consumption and thus boosting aggregate demand and GDP.