Sia
Question
Microeconomics
Posted 9 months ago
The natural rate of unemployment in Mithrim is 5\% and the current rate of unemployment is ,
Which of the following combinations of monetary and fiscal policy would be appropriate to return an economy to full employment?
Choose 1 answer:
(A) Lower the reserve ratio; increase taxes
(B) Increase the discount rate; increase government spending
(C) Sell bonds; decrease government spending
(D) Open market sales; increase taxes
(E) Buy bonds; decrease taxes
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Answer from Sia
Posted 9 months ago
Sure, let's analyze the question provided in the image and determine the appropriate combination of monetary and fiscal policy to return an economy to full employment.
The natural rate of unemployment in Mithrim is 5% and the current rate of unemployment is 9%. This indicates that the economy is experiencing a higher than natural rate of unemployment, suggesting a recessionary gap. To address this, we need to implement expansionary policies to stimulate economic activity and reduce unemployment.
Solution
a
Expansionary Monetary Policy: Buying bonds increases the money supply, which lowers interest rates and encourages borrowing and investment
b
Expansionary Fiscal Policy: Decreasing taxes increases disposable income for consumers, leading to higher consumption and aggregate demand
Answer
(E) Buy bonds; decrease taxes
Key Concept
Expansionary policies
Explanation
To reduce unemployment from 9% to the natural rate of 5%, expansionary monetary policy (buying bonds) and expansionary fiscal policy (decreasing taxes) are appropriate. These policies increase aggregate demand, stimulate economic activity, and reduce unemployment.
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