Which of the following would be an example of the use of fiscal policy to stimulate the economy?

• A. A decrease in the reserve requirement for banks.
• B. Intervention in the currency markets by the government to strengthen the U.S. dollar.
• C. Action by the Federal Reserve Board to increase the money supply.
• D. An increase in spending by the federal government on new highway construction.

Answer: (D)

Fiscal policy that aims to stimulate activity works by changing government spending or taxes to raise overall demand. Increasing federal spending on highway construction directly boosts government expenditures, which are a component of aggregate demand. This spending puts people to work, raises incomes, and through the spending multiplier stimulates more spending in the economy, helping to lift output and employment when demand is weak.

The other options involve monetary or exchange-rate actions, not fiscal policy. Lowering the reserve requirement, expanding the money supply, or intervening in currency markets all affect money supply or exchange rates rather than government spending and taxation.