Econia's unemployment rate is 7.5%, and its natural rate of unemployment is 4%. For Econia to return its economy to full employment:
A) the government could reduce the money supply so that the real value of money rises.
B) the government could lower taxes to stimulate aggregate demand.
C) it could be patient while prices rise enough to cause the labor market to move to equilibrium.
D) it could be patient while wages rise to attract more workers to labor markets and increase production.

Question

Quizplus · Accepted Answer

Lowering taxes can stimulate aggregate demand, which in turn can increase employment towards the natural rate. Reducing the money supply (A) would likely slow the economy and increase unemployment. Being patient for prices or wages to rise (C and D) does not actively return the economy to full employment.

Econia's Unemployment Rate Is 7