Which of the following is an appropriate stabilization policy for an economy in recession?
A) an open-market sale
B) a tax increase
C) a reduction of transfer payments
D) an increase in the discount rate
E) an increase in government purchases

Question

Quizplus · Accepted Answer

During a recession, the government may use expansionary fiscal policy, which involves increasing government purchases to boost aggregate demand and stimulate economic growth. This can be done by increasing spending on infrastructure, healthcare, education, or other public goods and services. This will increase the overall spending (consumption and investment spending) in the economy and create more jobs and income for households, which will eventually lead to a recovery in the economy. Other options, such as a tax increase, reduction of transfer payments or an increase in the discount rate could potentially reduce spending and worsen the recession. An open-market sale, while it may reduce the money supply, may not be effective in increasing spending during a recession, as households and businesses may be hesitant to borrow and invest.

Which of the Following Is an Appropriate Stabilization Policy for an Economy