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

Question

Quizplus · Accepted Answer

To counteract the inflationary effect of a tax decrease and stabilize output, the Federal Reserve could decrease the money supply. This action would help to control any potential increase in inflation that might result from the tax cut by making borrowing more expensive and slowing down the economy.

Suppose There Is a Tax Decrease