Answer to Question #254622 in Macroeconomics for BL4 TUT 9

Question

Suppose that the economy is operating at full employment. If the government wants to discourage consumption spending and stimulate investment spending, which of the following combinations of monetary and fiscal policy would most likely achieve these goals, assuming that consumption does not depend on the interest rate?

Monetary Policy- decrease money supply and Fiscal Policy- Increase personal income taxes

Monetary Policy- Increase money supply and Fiscal Policy- Increase personal income taxes

Monetary Policy- decrease money supply and Fiscal Policy-Increase government spending

Monetary Policy- Increase money supply and Fiscal Policy- decrease personal income taxes

Answer 1

Monetary policy- Increase money supply and Fiscal policy -Increase personal income taxes.

Expansionary monetary policy will increase money supply and stimulate investment by decreasing interest rates.

Contractionary fiscal policy will increase personal income taxes and cut down consumption spending because aggregate demand will be reduced.