Question
If a market economy was in a recession, which of the following would help direct it back toward the full employment rate of
output?
(1) lower resource prices and lower real interest rates
(2) an increase in the rate of inflation
(3) higher resource prices and higher real interest rates
(4) a decrease in the natural rate of unemployment
(4)
output?
(1) lower resource prices and lower real interest rates
(2) an increase in the rate of inflation
(3) higher resource prices and higher real interest rates
(4) a decrease in the natural rate of unemployment
(4)
Ask by Campos Conner. in Cayman Islands
Mar 31,2025
Upstudy AI Solution
Tutor-Verified Answer
Answer
Option 1: Lower resource prices and lower real interest rates would help direct the economy back toward full employment.
Solution
- In a recession, the economy is operating below its full-employment level of output.
- One way to stimulate the economy is to lower costs for producers and reduce borrowing costs for households and firms.
- Lower resource prices reduce production costs, which can lead to increased production.
- Lower real interest rates make borrowing cheaper, encouraging investment and consumption spending.
- Both of these effects help shift aggregate demand (and potentially aggregate supply) toward the full-employment level.
- Thus, option
lower resource prices and lower real interest rates is the choice that would most help direct a market economy back toward its full-employment rate of output.
Answered by UpStudy AI and reviewed by a Professional Tutor
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Simplify this solution Extra Insights
Historically, recessions often lead policymakers to implement strategy adjustments to revive economic growth. During the Great Depression, for instance, the U.S. government adopted substantial fiscal policies and created job programs, illustrating the effectiveness of interventions like lowering resource prices and real interest rates to stimulate demand and boost employment.
In practice, lowering resource prices and real interest rates can help businesses invest and expand, which could create jobs and decrease unemployment. For instance, during the 2008 financial crisis, central banks lowered interest rates significantly, making it cheaper for consumers to borrow money. This approach helps jumpstart consumer spending, essential for economic recovery.
