Given the scenario presented—where there is a significant decrease in the unemployment rate and a significant increase in the inflation rate—the appropriate recommendation would be to increase interest rates.
Here's why:
-
Decrease in Unemployment: This suggests that the economy is performing well and labor markets are tight, which can put upward pressure on wages and subsequently on prices (inflation).
-
Increase in Inflation: Rising inflation may indicate that demand in the economy is outpacing supply, leading to higher prices for goods and services.
By increasing interest rates, the Federal Reserve can help temper inflation by making borrowing more expensive. This typically reduces consumer and business spending, which can help cool down inflationary pressures. Therefore, in response to the current economic conditions, increasing interest rates would be the most suitable policy action.