"Last month unemployment fell to 4 percent, its lowest level in years. The economy is growing rapidly, but consumer prices have risen at an annual rate of 10 percent during the last six months." Which of the following policies would be most appropriate under these circumstances?

Question

Quizplus · Accepted Answer

With a low unemployment rate and rapid economic growth, the main concern is inflation caused by the rise in consumer prices. To combat inflation, the government should decrease aggregate demand by increasing taxes. This will reduce the amount of money in circulation and decrease spending, which will lower prices and stabilize the economy. An increase in government spending would only exacerbate the inflation problem by adding to the aggregate demand. A reduction in taxes would increase the amount of money in circulation, which would also contribute to inflation. Therefore, an increase in taxes is the best policy in this situation.

"Last Month Unemployment Fell to 4 Percent, Its Lowest Level