Which of the following scenarios will result in the largest reduction in inflation at the lowest cost in terms of a reduction in output?
A)monetary restriction combined with fiscal expansion
B)monetary restriction implemented after an oil price decrease
C)monetary expansion combined with fiscal contraction
D)a spending cut combined with a tax cut of equal magnitude
E)a sharp reduction in monetary growth after an oil price increase

Question

Quizplus · Accepted Answer

Monetary restriction after an oil price decrease can reduce inflation by slowing down the economy without significantly reducing output. The decrease in oil prices can offset the contractionary effects of monetary restriction, leading to a smaller reduction in output compared to other scenarios.

Which of the Following Scenarios Will Result in the Largest