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Question
Statistics
Posted 7 months ago

The natural rate of unemployment in Mithrim is 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) 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
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Answer from Sia
Posted 7 months ago
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.

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