Question

The economy is experiencing inflation and the unemployment rate has dropped from 4.2% to 2.4%. If the government wanted to influence the economy, which tool of fiscal policy should the government implement?

Answer 1

The government has to implement Contractionary fiscal Policy. It means it has to apply fiscal policy to decrease aggregate demand. It involves decrasing government purchases and/or increasing taxes.

Answer 2

If the economy is experiencing inflation and the unemployment rates aren't that high, the government should implement austerity measures, as even though they would increase unemployment, they would significantly lower the inflation. Austerity can be risky, though, as it can have negative impacts in economy by cutting expenses in important sectors.