Question

Which of the following are both policies that are consistent with trying to stabilize output when...

Which of the following are both policies that are consistent with trying to stabilize output when prices and output rise?

a. decrease the money supply and decrease taxes

b. increase the money supply and decrease taxes

c. decrease the money supply and decrease government expenditures

d. increase the money supply and decrease government expenditures

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Answer #1

Option c

c. decrease the money supply and decrease government expenditures

The policies required to stabilize the economy when output and prices are increasing is contractionary policies.

Monetary policy uses the money supply to control it. A contractionary monetary policy decreases the money supply to decrease AD and decrease output.

A fiscal policy uses taxes and spending to control it. A contractionary fiscal policy increases taxes or decreases government spending or both.

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