Suppose the target rate of unemployment is 5 percent but the actual rate of unemployment is 4 percent. Given this information, which of the following policies is most appropriate according to the AS/AD model?
A)A tax cut
B)An increase in government spending
C)A tax increase
D)No change in taxes or government spending

Question

Quizplus · Accepted Answer

When the actual unemployment rate is lower than the target rate, it suggests the economy might be overheating, leading to inflationary pressures. Increasing taxes (C) can help cool down the economy by reducing disposable income, thereby decreasing consumption and slowing down inflation.

Suppose the Target Rate of Unemployment Is 5 Percent but the Actual