You are hired by the Bureau of Economic Analogies (BEA) as an economic consultant. The chairperson of the BEA tells you that he believes the current unemployment rate is too high. The unemployment rate can be reduced if aggregate output increases. He wants to know what policy to pursue to increase aggregate output by $500 billion. The best estimate he has for the MPC is 0.75. Which of the following policies should you recommend?
A. Increase government spending by $500 billion and reduce taxes by $500 billion.
B. Increase both government spending and taxes by $500 billion.
C. Reduce government spending by $500 billion and reduce taxes by $500 billion.
D. none of the above
Answer: B
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Unemployment compensation is an example of a(n):
a. discretionary stabilizer. b. countercyclical stabilizer. c. procyclical stabilizer. d. seasonal stabilizer. e. automatic stabilizer.
The term market failure refers to
a. a situation in which the market on its own fails to allocate resources efficiently. b. an unsuccessful advertising campaign which reduces demand for a product. c. a situation in which competition among firms becomes ruthless. d. a firm that is forced out of business because of losses.