Question

The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?

Answer 1

Answer:

The correct answer is letter "A": increase government expenditures or increase the money supply.

Explanation:

Fiscal policy refers to the joint governmental decisions concerning taxation and spending of a nation. The term was coined by the British economist John Maynard Keynes (1883-1946) who claimed that governments could control rates of macroeconomic growth by raising the rate of employment, battling inflation and flattening business cycles.

Whether increasing government expenses or money supply, the overall economy will be balanced as long as the prices are going up as well.

Answer 2

Answer:

b. increase government expenditures or decrease the money supply  

Explanation:

If the government wanted to stabilize output, there are a couple of levers they could pull. These are fiscal policies and monetary policies, fiscal policy, is all about changing how much we spend, if government has more money to spend, they can better negotiate and also decide how money is spent to a degree. So, the theory is if the government spends more, that would increase total output. The second lever to pull is messing with the money supply, monetary policy, If maybe there's more money out there, lower interest rates, it might increase output however because we are dealing with the price of imported oil decreasing the money supply would be the move to make because by decreasing the money supply we can make our currency more valuable, it's important to remember that the price of imported oil would not be affected by domestic monetary policies. If the money supply were increased our currency would devalue which would be counterproductive because a weaker currency means we pay more for imports.