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

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the goal of reducing unemployment, which typically requires stimulating economic activity to increase demand for labor.
2. Step 2: Recall that expansionary fiscal policy involves increasing government spending or decreasing taxes to boost aggregate demand.
3. Step 3: Recognize that expansionary monetary policy involves lowering interest rates or increasing the money supply to encourage investment and consumption.
4. Step 4: Analyze how contractionary policies (either fiscal or monetary) reduce aggregate demand, which can increase unemployment rather than reduce it.
5. 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.