Chapter 20, Problem 7MCQ

To determine

The correct example of fiscal policy which is appropriate to combat recession

Answer to Problem 7MCQ

From the available options, the correct option is increasing interest rates.

Explanation of Solution

Combat recession refers to the policy which is used to control inflation by increasing the interest rates which in turn reduce the consumption in country and cause the inflation down which takes the economy toward recession.

Therefore, the correct option is increasing interest rates because if there is increase in taxes, and decrease in government spending then consumption level in economy would increase. Moreover, decrease in money supply and increase in government transfers do not come under the fiscal policy which is appropriate for combat recession as these factors also increase consumption level of people in country.

Here, the correct option is d (increasing interest rates) and all other options are incorrect.

Economics Concept Introduction

Introduction: Fiscal policy is a policy through which government spending and tax policies are used to make the economic conditions better.