Multiple Choice
In the United States, who is primarily responsible for setting fiscal policy (taxing and spending decisions)?
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19. Fiscal Policy
Introduction to Fiscal Policy
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Which of the following combinations of monetary and fiscal policy is most likely to reduce unemployment in an economy?
A
Expansionary fiscal policy and contractionary monetary policy
B
Expansionary fiscal policy and expansionary monetary policy
C
Contractionary fiscal policy and expansionary monetary policy
D
Contractionary fiscal policy and contractionary monetary policy
Verified step by step guidance1
Step 1: Understand the goal of reducing unemployment, which typically requires stimulating economic activity to increase demand for labor.
Step 2: Recall that expansionary fiscal policy involves increasing government spending or decreasing taxes to boost aggregate demand.
Step 3: Recognize that expansionary monetary policy involves lowering interest rates or increasing the money supply to encourage investment and consumption.
Step 4: Analyze how contractionary policies (either fiscal or monetary) reduce aggregate demand, which can increase unemployment rather than reduce it.
Step 5: Conclude that combining expansionary fiscal policy with expansionary monetary policy is most likely to reduce unemployment by simultaneously increasing demand through government spending and cheaper credit.
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