Question

If:

-The unemployment rate is 6%

-Gold prices have jumped by more than $200 an ounce in the last year, (a clear sign of rising inflation)

-The latest GDP figures show that economic rate of growth is still increasing although at a slower pace than last year.

What fiscal policy measures you would recommend and Why ?

(Looking for an original response please, not an old answer copied and pasted to answer this question)

Answer 1

The long run natural rate of unemployment for the United States according to the data is around 4.8% for the current year. according to this estimate we believe that 6% unemployment rate is indicating that economy is operating at a level of GDP which is less than its potential one. This is because the current rate of unemployment exceeds is natural rate.

Inflation is already increasing which suggest that the economy will be requiring a fiscal expansion. Fiscal measures can include government spending to boost the aggregate demand can be helpful. If the government is aiming for reducing the price level it can go for supply side policies. This will include tax cuts and tax benefits to industries so that aggregate supply curve shifts to the right and both the GDP gap and the higher inflation are tackled. There is not much evidence in support for supply side policies however. But fiscal policy has its own problems of time lags and crowding out private Investments which might mitigate its impact.