Question

Which of the following statements is true?

expansionary fiscal policy is appropriate to combat economic downturn

The Fed should reduce the discount rate to combat economic downturn

an increase in inflation rate tends to bring down real interest rates, holding everything else constant

A $1 increase in government spending tends to raise GDP by more than $1

any one of the answers is correct.

Answer 1

Ans: any one of the answers is correct.

Explanation:

The central government adopts an expansionary fiscal policy to combat gainst recession or econoic downturn. The Fed also adopts an expansionary monetary policy to combat gainst recession or econoic downturn. The main objective of both the policy is to inject more money supply in the economy. So that the money supply increases in the economy.

Real interest rate = Nominal interest rate - Inflation rate. So the real interest rate and inflation rate are inversely related.

A $1 increase in government spending tends to raise GDP by more than $1 due to the spending multiplier effect.