Question

To solve each of the following problems, 37-39, indicate how you would use an appropriate monetary and a fiscal policy tool. Do not use the same specific policy solution more than once. 37 CPI: increasing at a 4% rate 38. GDP: increasing at .5% rate 39. Unemployment rate: 8%.

Answer 1

37. CPI is increasing at a higher rate. Thus, aggregate demand in the economy needs to be reduced. This can be done by following contractionary monetary monetary and fiscal policy. This involves reduction in the level of money supplied by the Central Bank and reduction of government expenditure and increase in government taxes. The above changes will help in reduction of aggregate demand in the economy.

38. GDP is increasing at a lower rate and thus aggregate demand in the economy needs to be increased. This can be done by following expansionary monetary and fiscal policy of the government. This involves increase in the level of money supplied by the government and increase in government expenditure and reduction in government taxes. The above changes will help in increasing aggregate demand and thus increase growth rate of GDP in the economy.

39. The unemployment rate in the economy is very high. Labor demand in the economy can be increased by increasing the level of aggregate demand in the economy. This can be done by increasing government expenditure and reducing government taxes. This will increase aggregate demand and reduce unemployment rate in the economy.