Question

In an economy the unemployment rate is 10 percent and the inflation rate is 1 percent. An

appropriate fiscal policy in this phase of the business cycle would be to

a) increase government spending
b) increase income taxes
c) decrease transfer payments
d) decrease the money supply

Answer 1

To combat the high unemployment rate and low inflation in an economy, the correct fiscal policy would be to increase government spending, in line with Keynesian expansionary fiscal policy aimed at stimulating economic growth and reducing unemployment.

Step-by-step explanation:

In the context of an economy with a 10 percent unemployment rate and a 1 percent inflation rate, the application of Keynesian macroeconomic policies would suggest that an appropriate fiscal policy is to stimulate growth and reduce unemployment. Given that high unemployment is a primary concern and inflation remains low, an expansionary fiscal policy would be suitable. This can be implemented through increased government spending or tax cuts, which aims to shift the aggregate demand curve to the right, increasing output and decreasing unemployment.

Therefore, the correct answer to the question posed would be to increase government spending, which is an expansionary fiscal policy action meant to stimulate economic growth. Increasing income taxes, decreasing transfer payments, or decreasing the money supply are all contractionary measures that would not be appropriate given the economic indicators described.