Suppose there is a tax increase.To stabilize output,the Federal Reserve will
A)increase government spending.
B)increase the money supply.
C)decrease government spending.
D)decrease the money supply.

Question

Quizplus · Accepted Answer

When there is a tax increase, people tend to have less disposable income, which can lead to a decrease in spending and a decrease in output. To stabilize output, the Federal Reserve can increase the money supply, which can encourage more spending and boost economic activity. Increasing government spending may also help to boost output, but this is not always the most effective approach and can lead to inflation if not carefully managed. Decreasing government spending or decreasing the money supply would likely have a contracting effect on the economy and could exacerbate the negative impacts of the tax increase.

Suppose There Is a Tax Increase