If Congress increases taxes to balance the federal budget, then to prevent unemployment and a recession the Fed will
A) reduce interest rates by increasing the money supply.
B) increase interest rates by decreasing the money supply.
C) increase interest rates by increasing the money supply.
D) reduce interest rates by decreasing the money supply.

Question

Quizplus · Accepted Answer

If Congress increases taxes to balance the federal budget, it results in less money being in circulation in the economy, which can cause a recession and increased unemployment. To prevent this, the Fed would need to increase the money supply by reducing interest rates. Lower interest rates encourage borrowing and spending, which can boost economic activity and prevent a recession.

If Congress Increases Taxes to Balance the Federal Budget, Then