SIE practice questionhardContractionary Fiscal Policy
If the government wants to combat high inflation using fiscal policy, it would MOST likely:
- AIncrease taxes and decrease government spending✓ Correct answer
- BDecrease taxes and increase government spending
- CLower the federal funds rate target
- DBuy government securities through open market operations
Explanation
Why A — Increase taxes and decrease government spending
To fight inflation through fiscal policy, the government would use contractionary measures: increasing taxes and decreasing government spending. Lowering the federal funds target or buying government securities are monetary policy actions taken by the Federal Reserve.
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