Assume the economy in the United States has an unemployment rate of 7.8% and that rate has been slowly climbing for the last 7 months. The GDP is $13.6 trillion down from $14.2 trillion 3 quarters ago. The rate of inflation is negligible and has hovered near zero for the last 9 months. M-1 is 1.5 trillion. The Natural Rate of Unemployment in the economy is 4.5%

1. Assuming the government decides to act and engage in a fiscal policy. Which policy approach is most appropriate? (Expansionary Policy or Contractionary Policy)

2. If the government decided to use Government Purchases as the policy tool, what should they do? Be sure to explain how that tool would work.

3. If the government decided to use Taxes as the policy tool, what should they do? Be sure to explain how that tool would work.

4. Which of the two tools you explained in questions 2 and 3 would you recommend? Explain.

5. Based on the Policy you selected in Question 1 and the tools you selected to address that problem in Questions 2 and 3, are the Unemployment Problem, Policy, and Tool(s) consistent with the current situation in the United States.