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 by the Fed
B)A government surplus and the sale of securities in the open market by the Fed
C)A larger government deficit and an increase in the discount rate
D)A larger government surplus and a reduction in the discount rate

Question

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 by the Fed
B)​A government surplus and the sale of securities in the open market by the Fed
C)​A larger government deficit and an increase in the discount rate
D)​A larger government surplus and a reduction in the discount rate

Quizplus · Accepted Answer

A larger budget deficit and the purchase of securities in the open market by the Fed would increase government spending and lower interest rates, respectively, which would stimulate demand and reduce unemployment. This combination of expansionary fiscal and monetary policy is appropriate for an economy facing high unemployment. Option B, a government surplus and the sale of securities by the Fed, is contractionary and would likely worsen the employment situation. Option C, a larger government deficit and an increase in the discount rate, is inconsistent because the Fed increases the discount rate to combat inflation, not unemployment. Option D, a larger government surplus and a reduction in the discount rate, is also inconsistent because it combines contractionary fiscal policy (a surplus) with expansionary monetary policy (a reduction in the discount rate).

If Policy Makers Wanted to Use Both Monetary and Fiscal