Suppose that rising world oil pricesreduce short-run aggregate supply in an oil-

Question

Suppose that rising world oil pricesreduce short-run aggregate supply in an oil-importing country andpush the economy into a recession. Which of the following might bean effective fiscal policy that the government can implement inorder to bring the economy back to potential output?

I. Increase the amount of printed currency in circulation
II. Cut taxes for households around the country
III. Increase funding to build public highways
IV. Lower the prices of all other goods and services
A.   I and IV B.   II and III C.   I and III D.   II and IV

Explanation / Answer

We need expansionary fiscal policy, not monetarypolicy:
I. Increase the amount of printed currency in circulation-only make oil price higher and harder to deal with (also this ismonetary policy
II. Cut taxes for households around the country-increase spending could help with recession
III. Increase funding to build public highways- expansionary fiscalpolicy example
IV. Lower the prices of all other goods and services- price ceilingwould just hurt the business (since it is high input cost ofoil) In my opinion, B is the answer

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