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Question
Statistics
Posted 10 months ago

The natural rate of unemployment in Mithrim is 5%5 \%, and the current rate of unemployment is 2%2 \%. Also, the consumer price index (CPI) has been increasing rapidly.

Which of the following combinations of monetary and fiscal policy would be appropriate to return this economy to full employment?

Choose 1 answer:
(A) Increasing taxes; lower the discount rate
(B) Decreasing taxes; buy bonds
(C) Increase government spending; sell bonds
(D) Increasing taxes; increasing government spending
(E) Increasing taxes; open market sales
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Answer from Sia
Posted 10 months ago
Solution by Steps
step 1
Identify the economic conditions: The natural rate of unemployment is 5%5\% and the current rate of unemployment is 2%2\%. This indicates that the economy might be overheating as the unemployment is below the natural rate. Additionally, the CPI is increasing rapidly, suggesting inflationary pressures
step 2
Determine the policy response: To counteract inflation and bring the economy back to full employment (closer to the natural rate of unemployment), contractionary policies are needed. This would involve either decreasing government spending, increasing taxes, or using monetary policy to decrease the money supply
step 3
Match the policies to the conditions: Among the given options, increasing taxes is a contractionary fiscal policy, and open market sales (selling bonds) is a contractionary monetary policy as it reduces the money supply. Both actions would help to cool down the economy and address the rapid increase in CPI
Answer
E
Key Concept
Contractionary Monetary and Fiscal Policies
Explanation
To reduce inflation and lower an overheated economy to its natural rate of unemployment, contractionary monetary and fiscal policies are required, which involve actions like increasing taxes and selling bonds to decrease the money supply.

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