Question

When would the government most likely decrease its spending?

Answer 1

D. When unemployment has descreased

Answer 2

The correct answer is D.

Goverments aim to minimize the size of the oscillations that the economy suffers during the business cycle. In order to do so, the goverment can use the fiscal and monetary policy mecanisms, but in the opposite direction than the one of the growth trend.

A contractionary policy (decrease goverment expending or decrease money supply) should be used during the expansionary phase of high GDP growth and low unemployment, while an expansionary policy (increase public spending or increase money supply), needs to be applied during a recession.