Question

Suppose the target rate of unemployment is 5 percent but the actual rate of unemployment is 4 percent. Given this information, which of the following policies is most appropriate according to the AS/AD model?
A. A tax cut.
B. An increase in government spending.
C. A tax increase.
D. No change in taxes or government spending.

Answer 1

Answer:

The best answer is "C"

"A tax increase"

Explanation:

The most appropriate according to the AS/AD model is to increase the tax and this is because the unemployment rate is beneath the target rate, output is most likely above potential, so a contractionary policy is most appropriate.

Answer 2

Answer:

C. A tax increase

Explanation:

Tax increase is an increase in the amount of tax that people and companies are obliged to pay

In order to avoid high interest rates substantial tax increases would be needed.

They are calling for large spending cuts and tax increases.