Question #11 – Economics (monetary vs. fiscal policy)

During a difficult period in the business cycle, the government intervenes and takes a number of steps to stimulate the economy. Which of the following monetary policies will help stimulate the economy?

  1. Increasing the overnight rate
  2. Increasing special purchase and resale agreements
  3. Decreasing income tax rates
  4. Both b and c
Solution: Increasing the overnight rate will not help the economy, it will slow it down. Increasing special purchases and resale agreements will help the economy. Decreasing income taxes will also help the economy but it is a fiscal policy (and not a monetary policy). The correct answer is b.