To correct a severe recession, a combination of fiscal and monetary policies is needed to stimulate the economy. Here are the possible options and the correct combination:
(A) Increasing income tax rates and decreasing the money supply: This option would likely worsen the recession by reducing consumer spending and investments due to higher taxes and limited access to money.
(B) Increasing both the income tax rates and the money supply: This combination would also not be effective as it involves conflicting policies that could lead to uncertainties in the economy.
(C) Decreasing both the income tax rates and the money supply: Lowering both tax rates and the money supply simultaneously might not effectively address the recession as it may not provide the necessary stimulus to boost economic activity.
(D) Decreasing income tax rates and increasing the money supply: This combination is likely to be the most effective in correcting a severe recession. Lowering income tax rates encourages consumer spending and investments, while increasing the money supply provides liquidity in the economy, making borrowing easier and stimulating economic growth.
(E) Decreasing income tax rates and increasing the federal funds rate: While lowering tax rates can boost spending, increasing the federal funds rate might restrict borrowing and investment, potentially counteracting the positive effects of tax cuts.
In conclusion, the most effective combination to correct a severe recession would be to decrease income tax rates and increase the money supply. This strategy aims to stimulate economic activity by encouraging spending and making credit more accessible, thus helping to lift the economy out of a recession.
