Question

1. Name two contractionary fiscal policies.

2. Name one contractionary monetary policy.

3. The current U.S. unemployment rate is above the long-run average (below full-employment).  Name an appropriate monetary policy response and two appropriate fiscal policy responses to restore full-employment GDP.

Answer 1

a) Two contractionary fiscal policy is increase in the taxes in the market and reduction in the government purchases.

b) Two contractionary monetary policy is increase in the discount rate and selling bonds in the market.

c) As the unemployment rate is above the normal rate, there is recession in the market, for this they will have to lower the discount rate and buy bonds in the market, for fiscal policy lower the taxes and increase the government purchases.