Suppose the economy is in a recession. To increase demand using discretionary fiscal policy, the government can

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To increase demand during a recession, the government can use expansionary fiscal policy which involves increasing government spending or reducing taxes. This encourages individuals and businesses to spend more, thus boosting aggregate demand. Raising taxes or reducing government spending, as in option B, would have the opposite effect and further dampen demand. Option A, raising interest rates, is a tool of monetary policy, not fiscal policy, and is typically used to combat inflation. Option D, reducing interest rates, is also a tool of monetary policy, but could be used to stimulate borrowing and spending in the economy. However, in a recession, fiscal policy is typically preferred as the interest rates may already be near zero and monetary policy may not be effective.

Suppose the Economy Is in a Recession