Question

Country Q has experienced a rapid increase in its unemployment rate and a sharp decline in its GDP.

What might policymakers do in the face of these economic indicators?

Responses

increase taxes so the government has more money to spend
increase taxes so the government has more money to spend

encourage a decrease in purchasing until employment figures increase
encourage a decrease in purchasing until employment figures increase

try to trade with other nations to increase production and create new jobs
try to trade with other nations to increase production and create new jobs

implement controls on wages, forcing employers to pay higher wages

Answer 1

Best choice: "try to trade with other nations to increase production and create new jobs."

Reasoning:
- A rise in unemployment and a drop in GDP call for policies that boost aggregate demand and job creation. Encouraging more exports or liberalizing trade can increase demand for domestic production and create jobs.
- The other options are counterproductive:
- Increasing taxes would reduce disposable income and further depress demand.
- Encouraging consumers to cut purchases would deepen the downturn.
- Forcing higher wages through controls can raise employer costs and may increase layoffs, worsening unemployment.

(Policymakers would more commonly use expansionary fiscal policy — higher government spending or tax cuts — and expansionary monetary policy — lower interest rates — to combat this situation.)