Question

The economy is experiencing inflation and the unemployment rate has dropped from 4.2% to 2.4%. If the government wanted to influence the economy, which tool of fiscal policy should the government implement?

Answer 1

A. Decrease government spending and increase tax rates.

Answer 2

Since inflation is on the high and the unemployment rates are not that worrying, Austerity would be some options of fiscal policy to increase the revenue while lowering the inflation and cut expenses, even though it increases the unemployment rates. Austerity measures can be risky for the economy, because little spendings on some sectors can throw the economy out of balance.