Chapter 36, Problem 3MCQ

To determine

The correct option which is the main arguments against using fiscal stimulus during Great recession

Answer to Problem 3MCQ

From the available options, the correct option is “spending programs might undermine investors' faith in the government's ability to repay its debts, leading to an increase in long-term interest rates.”

Explanation of Solution

The use of monetary policy to reduce interest rates was not an argument because the management of money supply and interest rates are handled by the central banks. In depressed economy, if the private investment was crowding out then it would affect in the long-run. Implementation lags were the delay in response to economic shock which were of a high concern to implement the policy to fix the economy. It is not always possible to decrease interest rate if government increase their spendings because if there are slack resources then it is difficult to do. And, during Great recession, the main argument which contradicted the use of fiscal stimulus was consider spending programs that might undermine investors' faith in the government's ability to repay its debts as it led to an increase in long-term interest rates which would further affect the economy in long-run.

Therefore, the correct option is e (spending programs might undermine investors' faith in the government's ability to repay its debts, leading to an increase in long-term interest rates) and all other options are incorrect.

Economics Concept Introduction

Introduction: The monetary policy is used to control the supply of money in an economy to achieve the targeted economic growth. The government of a nation implements fiscal policy through spending and taxes to affect the economic climate of the country.