5. The correct answer is (C). The objective of deficit spending is
to create jobs. With greater employment, workers will have more
money to spend. This stimulates demand, thus increasing
production that creates even more jobs. It was the theory behind
Roosevelt’s economic policy of “priming the pump.” Many
Democratic presidents since Roosevelt have followed it. Choice
(B) is the definition of supply-side economics, the theory behind
Ronald Reagan’s economic policy; it states that by giving people
more money, they will increase their savings and their purchas-
ing power, thereby generating more economic activity. Stagfla-
tion, choice (D), is a condition of the economy in which inflation
combines with low economic activity; it was the prevailing
economic condition of the 1970s. Choice (E) is the definition of
cost-of-living adjustment, which is also found in some govern-
ment programs, such as Social Security. Choice (A) is a definition
of the policy known as protectionism.
Practice Set 3
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