Question

1) During a recession, what will the federal government MOST LIKELY do to stabilize the economy? A) increase taxes significantly B) maintain its level of taxation C) maintain its level of spending D) significantly change its spending

Answer 1

The correct answer is D.

The federal goverment would actually increase its spending and perform an expansionary monetary policy.

During a recession, the reason for conducting an expansionary monetary policy is to boost aggregate demand. If the government invests public money on new projects, employment rates will be increased as people would be needed to work on them. Moreover, these people who were previously unemployed start to earn a salary and to increase their demand of goods,  service and investment opportunities. Moreover, goverment spending can be used to boost demand directly through granting subsidies or money transfers to the mostly harmed sectors of the economy.

Answer 2

It would most likely be D) significantly change its spending