How would the government most likely respond to a decrease in consumer spending?

A. By raising interest rates

B. By decreasing the money supply

C. By adding to its discretionary spending budget

D. By raising income taxes

C. By adding to its discretionary spending budget - Apex

The correct answer is C.

A decrease in consumer spending means a decrease in the aggregate demand levels and, in consequence, in total output and in the employment figures. Therefore, the economy is experiencing a contraction.

In order to reverse the trend, a discretionary spending budget can be implemented. Investing public money would boost aggregate demand levels and create job positions. These new workers will start to earn a salary, increase their income available and start to demand more goods and service, therefore expanding aggregate demand even further. Therefore, the economy will start to grow again.