When exchange rates are fixed, a government, to counter a temporary negative demand shock, should, in part:
A) reduce taxes.
B) reduce defense spending.
C) reduce the money supply.
D) reduce defense spending and the money supply.

Question

Quizplus · Accepted Answer

Reducing taxes can stimulate demand by increasing disposable income, which is a suitable response to a temporary negative demand shock under fixed exchange rates.

When Exchange Rates Are Fixed, a Government, to Counter a Temporary