Expansionary Policies for Recession Recovery

Steps:

• Identify recession: 2018 shows high unemployment (10%) and negative GDP growth (-2%), vs. 2014's low unemployment (3%) and positive growth (4%).
• Recall Okun's law: Higher unemployment correlates with lower GDP; expansionary policies needed to shift aggregate demand rightward.
• Select policies boosting AD: Expansionary fiscal (↑G or ↓taxes) and monetary (↓interest rates) stimulate spending and investment.
• Evaluate options: Choose combination maximizing expansionary effects without contractionary offsets.

Why C is correct:

• Increase in government spending directly raises AD (fiscal multiplier effect), while lower interest rates encourage borrowing/investment, aligning with IS-LM model's expansionary shift.

Why the others are wrong:

• A: Tax cut expands AD, but higher interest rates reduce investment, creating conflicting effects.
• B: Higher taxes contract AD by lowering disposable income, offsetting lower interest rates' benefits.
• D: Both higher taxes and interest rates contract AD, worsening recession per contractionary policy principles.

Final answer: C