the economy of isengard is experiencing high inflation and a rate of unemployment below the natural rate…
the economy of isengard is experiencing high inflation and a rate of unemployment below the natural rate. which of the following combination of fiscal and monetary policy actions would be the most appropriate response to this output gap? choose 1 answer: a increase taxes; buy bonds b increase government spending; decrease taxes c buy bonds; decrease the reserve ratio d decrease government spending; decrease the money supply e decrease taxes; increase the money supply
Answer
Brief Explanations:
High inflation and unemployment below the natural rate indicate an over - heated economy. Contractionary fiscal policy (decrease government spending) and contractionary monetary policy (decrease money supply) are needed to cool down the economy. Decreasing government spending reduces aggregate demand directly. Decreasing the money supply increases interest rates, which in turn reduces investment and consumption, lowering aggregate demand.
Answer:
D. Decrease government spending; decrease the money supply