Expansionary Monetary and Fiscal Policies to Increase Output

Steps:

• Recognize economy has output gap (Y < Yf), allowing demand stimulus without immediate inflation.
• Identify expansionary policies: lower interest rates boost investment/consumption; tax credits encourage capital spending.
• Evaluate combinations for net AD increase targeting full employment.
• Select option aligning both monetary and fiscal tools for balanced growth.

Why A is correct:

• Decreasing rates (via IS-LM model) shifts LM curve right, lowering borrowing costs; investment tax credits reduce after-tax cost of capital, raising aggregate demand to close gap per AD-AS framework.

Why the others are wrong:

• B: Both actions contract AD—tight money raises rates, higher taxes cut profits/investment—worsening recession.
• C: Higher rates contract AD via reduced borrowing; tax threshold rise mildly expands consumption but net effect likely reduces output.
• D: Expands AD but welfare hikes target consumption without supply incentives, risking demand-pull inflation.

Final answer: A