The economy has seen the unemployment rate increase from 6 percent to 9.5 percent, the inflation rate decrease from 2.8 percent to 1.2 percent, and there has been a 24 percent decline in consumer spending and a 45 percent decline in investment spending in the same time period.
a) Given the above, what would you predict about the overall direction of the economy?
b) Describe the appropriate discretionary fiscal policy that the government should adopt, given the above situation.
c) Describe the appropriate monetary policy that the central bank should be operating, given the above situation.
a) Employment, inflation, and spending are all down. Those are all symptoms of a decrease in Aggregate Demand (AD). The economy is slipping ...
This solution shows how to use economic indicators such as the unemployment rate and the inflation rate to predict the overall direction of the economy, as well as recommend the appropriate fiscal and monetary policy.