If policy makers wanted to use both monetary and fiscal policy to stimulate demand and reduce a high rate of unemployment, which of the following would be most appropriate?
A) a larger budget deficit and the purchase of securities in the open market
B) a government surplus and the sale of securities in the open market
C) a larger government deficit and an increase in the discount rate
D) a government surplus and a reduction in the discount rate

Question

Quizplus · Accepted Answer

Option A involves using expansionary fiscal policy (increased government spending or tax cuts) to stimulate demand, and expansionary monetary policy (purchase of securities in the open market) to lower interest rates and further encourage spending. This combination is likely to be the most effective in reducing unemployment and increasing economic growth. Option B involves contractionary fiscal and monetary policy, which could worsen the unemployment situation. Option C involves expansionary fiscal policy and contractionary monetary policy, which could limit the effectiveness of the fiscal policy in stimulating demand. Option D involves contractionary fiscal policy and expansionary monetary policy, which could worsen the unemployment situation. Therefore, option A is the most appropriate choice.

If Policy Makers Wanted to Use Both Monetary and Fiscal