Suppose the economy has a high level of unemployment. This would imply
A)that the government should engage in expansionary fiscal policy and increase the tax rate.
B)that the economy is operating to the left of the LRAS curve and that government spending could be increased to reduce unemployment.
C)that fiscal policy has been ineffective and should be abandoned.
D)that the economy is operating on the SRAS curve and that government spending could be decreased to reduce unemployment.

Question

Quizplus · Accepted Answer

High levels of unemployment suggest that the economy is operating below its potential (to the left of the LRAS curve). In this case, expansionary fiscal policy (increasing government spending and/or decreasing taxes) can help to increase aggregate demand and shift the economy back towards the LRAS curve, reducing unemployment. Option A is incorrect because increasing taxes would have the opposite effect of expansionary fiscal policy. Option C is incorrect because fiscal policy may not have been ineffective - it simply may not have been used at all. Option D is incorrect because decreasing government spending would reduce aggregate demand, making the problem of unemployment worse.

Suppose the Economy Has a High Level of Unemployment