If the economy were encountering a severe recession, proper monetary and ﬁscal policies would call for
A) selling government securities, raising the reserve ratio, lowering the discount rate, increasing interest paid on reserves held at Fed banks, and a budgetary surplus.
B) buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deﬁcit.
C) buying government securities, raising the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary surplus.
D) buying government securities, reducing the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deﬁcit.

Question

Quizplus · Accepted Answer

During a severe recession, the government should undertake expansionary monetary and fiscal policies. Expansionary monetary policy involves buying government securities, reducing the reserve ratio, and reducing the discount rate. These policies increase the money supply, which lowers interest rates and encourages borrowing and investment. To support these policies, interest paid on reserves held at Fed banks should be reduced.

On the other hand, expansionary fiscal policy involves increasing government spending or reducing taxes, which stimulates demand and supports economic growth. A budgetary deficit may be necessary to finance these policies. Therefore, option B is the best choice as it recommends expansionary monetary policies and a budgetary deficit to tackle a severe recession.

If the Economy Were Encountering a Severe Recession, Proper Monetary