[Jotmo]

I missed this one.

30) Which of the following fiscal policy combinations would a government most likely follow to stimulate economic activity when the economy is in a severe recession?

A. increasing both taxes and spending

B. increasing taxes and decreasing spending

C. decreasing taxes and increasing spending

D. decreasing both taxes and spending

I answered "D". They said the answer was "C".

I take issue with that one. "D" wold be the best thing to do to help the economy.

Actually, "B" is what they're most likely to do, so I guess we're both wrong.

[Tench_Coxe]

Actually, C is correct because the government tries to inject money into the business cycle (sometimes called "priming the pump"). The problem since at least the LBJ presidency is that the government has tended to follow "A", even in times of an expanding economy, the Reagan years and post 1994 Clinton years excepted. Although Bush 43 did not increase taxes, he did increase massive deficit spending.

Problem now is, the US government does not have much maneuvering room to pursue "C", risking hyperinflation and people less willing to buy debt in the form of treasury bonds/bills (i.e., the US credit worthiness is shot).

[gogogodzilla]

They’re right. Decreasing spending allows companies/citizens to keep more of their money... to hopefully spend.

Furthermore, more government spending means more money paid to companies... which then hire people and pay them money (which they then keep more of, due to point 1).