The natural rate of unemployment in Mithrim is 5\%, and the current rate of unemployment is $2 \%$. 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) Decreasing taxes; buy bonds
(B) Increase government spending; sell bonds
(C) Increasing taxes; increasing government spending
(D) Increasing taxes; open market sales
(E) Increasing taxes; lower the discount rate

Question

The natural rate of unemployment in Mithrim is 5\%, and the current rate of unemployment is $2 \%$. 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) Decreasing taxes; buy bonds
(B) Increase government spending; sell bonds
(C) Increasing taxes; increasing government spending
(D) Increasing taxes; open market sales
(E) Increasing taxes; lower the discount rate

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ Identify the current economic conditions in Mithrim: The natural rate of unemployment is 5%, the current rate of unemployment is 2%, and the CPI is increasing rapidly. This indicates an economy that is overheating with inflationary pressures. ‖ ‖ step 2 ⋮ Determine the appropriate monetary policy: To combat inflation, the central bank should implement contractionary monetary policy, which includes selling bonds to reduce the money supply. ‖ ‖ step 3 ⋮ Determine the appropriate fiscal policy: To reduce inflation, the government should implement contractionary fiscal policy, which includes increasing taxes to reduce consumer spending. ‖ ‖ step 4 ⋮ Combine the appropriate policies: The combination of increasing taxes and selling bonds will help to reduce inflation and bring the economy back to full employment. ‖ ***D*** ∻Key Concept∻ ⚹Contractionary policies to combat inflation⚹ ∻Explanation∻ ⚹In an overheating economy with low unemployment and rising CPI, contractionary monetary and fiscal policies (increasing taxes and selling bonds) are appropriate to reduce inflation and stabilize the economy.⚹◊What is the equation for calculating the natural rate of unemployment in an economy?⍭ Generate me a similar question◊

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