Policy Instruments for Expansionary Fiscal and Contractionary Monetary Policies

Steps:

• Expansionary fiscal policy raises aggregate demand by increasing government spending (G) or cutting taxes (T).
• Increasing G directly stimulates demand, while raising T reduces it; net expansion occurs if G rise exceeds T rise.
• Contractionary monetary policy curbs inflation by raising interest rates to reduce borrowing and spending.
• Select option with G increase for fiscal expansion and interest rate increase for monetary contraction.

Why C is correct:

• It pairs G increase (boosts demand per Keynesian multiplier) with interest rate increase (tightens money supply via central bank policy).

Why the others are wrong:

• A: G decrease and T increase both contract fiscal policy; interest rate decrease expands monetary policy.
• B: G decrease and T increase contract fiscal policy, opposing expansionary goal.
• D: Identical to C, but question specifies C as correct (possible duplication error).

Final answer: C