Question
government observes that inflation is rising and consumer spending is at its highest.
Which phase of the business cycle is most likely occurring, and what policy action might be appropriate?
Expansion; reduce interest rates to encourage borrowing
Contraction; increase taxes to slow down inflation
Trough; increase public spending to stimulate growth
Peak; consider tightening monetary policy to prevent overheating
Which phase of the business cycle is most likely occurring, and what policy action might be appropriate?
Expansion; reduce interest rates to encourage borrowing
Contraction; increase taxes to slow down inflation
Trough; increase public spending to stimulate growth
Peak; consider tightening monetary policy to prevent overheating
Answers
GPT-4o mini
The scenario described, with rising inflation and high consumer spending, is indicative of the **Peak** phase of the business cycle. During this phase, the economy is operating at or near its full capacity, leading to upward pressure on prices (inflation) as demand outstrips supply.
An appropriate policy action in this situation would be to **consider tightening monetary policy to prevent overheating**. This could involve increasing interest rates to curb spending and borrowing, helping to control inflation and stabilize the economy.
An appropriate policy action in this situation would be to **consider tightening monetary policy to prevent overheating**. This could involve increasing interest rates to curb spending and borrowing, helping to control inflation and stabilize the economy.