Open-market sale of bonds by Fed â†' reserves and interest rate:

This option suggests that taxes are reduced, but it does not indicate an increase in spending. While lowering taxes can provide immediate relief to consumers, without an increase in government spending, the overall effectiveness in stimulating economic growth would be limited, especially during a recession.

This choice correctly identifies the two main components of expansionary fiscal policy: reducing taxes and increasing government spending. By lowering taxes, disposable income for consumers rises, which boosts consumption. Concurrently, increasing government spending directly injects money into the economy, creating jobs and increasing demand for goods and services, thereby effectively combating a recession.

This option indicates a reduction in taxes but suggests a decrease in spending, which contradicts the principles of expansionary fiscal policy. Reducing taxes alone may not sufficiently stimulate the economy if government spending is concurrently cut, as this would reduce overall economic activity and exacerbate recessionary conditions.