Imagine that the U.S. economy is characterized by falling GDP and a rising unemployment rate, driven...

Imagine that the U.S. economy is characterized by falling GDP and a rising unemployment rate, driven by a large decline in business investment. TRUE or FALSE. An effective strategy to reduce the unemployment rate would be higher government spending. Explain.

Solutions

Expert Solution

False, the problem here is not lack of demand. Government spending will act as a demand shock and increase demand but the problem is that the businesses are not investing enough. Thus, there need to be measures to improve business investing such as a decline in the interest rates. An increase in government spending can lead to an increase in interest rates and more crowding out of private business investment.

Rahul Sunny answered 1 year ago

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