Suppose the economy is producing below the natural rate of output and the government is suffering from large budget deficits. To deal with the deficit problem,suppose the government takes a policy action to reduce the size of the deficits. This policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run,everything else held constant.
A)an increase;an increase
B)a decrease;a decrease
C)a decrease;an increase
D)an increase;a decrease

Question

Quizplus · Accepted Answer

Reducing the size of budget deficits typically involves decreasing government spending or increasing taxes. In the short run, such contractionary fiscal policies would likely decrease aggregate demand, leading to lower inflation rates. However, with reduced demand, firms may produce less and hire fewer workers, potentially increasing the unemployment rate.

Suppose the Economy Is Producing Below the Natural Rate of Output