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Difficulty: MediumMonetary Policy, Fiscal Policy, and Economic Tools

During a period of rapid economic expansion accompanied by rising inflation, federal lawmakers intend to pass legislation implementing a contractionary fiscal policy measure to help stabilize price levels. Which of the following actions represents an exercise of fiscal policy controlled by Congress?

  1. Increasing statutory personal and corporate income tax ratesAnswer
  2. B
    Increasing the discount rate charged to member banks for short-term loans
  3. C
    Selling U.S. Treasury securities directly to primary dealers via open market operations
  4. D
    Adjusting policy based on changes in the average duration of unemployment

Answer

Increasing statutory personal and corporate income tax rates is an exercise of fiscal policy managed by Congress.
Fiscal policy consists of legislative decisions regarding federal taxation and government spending authorized by Congress and the President. Raising personal and corporate tax rates drains liquidity from the economy, reducing consumer spending and corporate investment to combat inflation.

Step-by-Step Solution

1
Distinguish between fiscal policy and monetary policy.
Fiscal policy is managed by Congress and the Executive Branch through taxation and government spending. Monetary policy is managed by the Federal Reserve through interest rates, reserve requirements, and open market operations.
The question specifically asks for a fiscal policy action undertaken by federal lawmakers.
2
Evaluate the candidate actions for government authority and policy type.
Changing income tax rates is a tax policy enacted by Congress (fiscal policy). Adjusting the discount rate or buying/selling Treasuries via open market operations are Federal Reserve actions (monetary policy).
Identifying the governing body and regulatory tool establishes the correct classification.

Key Concept

Fiscal Policy vs. Monetary Policy Tools
Estimated Time:1m 0s
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Topics

Monetary Policy, Fiscal Policy, and Economic Tools

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