Question

Suppose an economy were experiencing a high rate of unemployment, an appropriate corrective measure by the government would be to:

reduce personal income tax.

reduce government spending.

reduce unemployment compensation

reduce the rate of interest for borrowing

reduce transfer payments.

Answer 1

Reduction in government spending such as unemployment compensation and transfer payment would not help the economy reducing the rate of unemployment because they are likely to reduce economic activity, demand for goods and services, production and thus, it results in increasing the unemployment.

Two policies can work: reduce personal income tax and reduce the rate of interest for borrowing. While the former raises disposable income the second raise investment spending and therefore both stimulate the aggregate demand. This is likely to raise production and so firms will hire more labor. This results in decreasing the unemployment. Note that reducing tax rate is in the authority of the government but not the rate of interest. Therefore select reducing personal income taxes.