Suppose that the federal government wants to address high levels of unemployment in the economy using fiscal policy. Which of the following actions would be most appropriate?

• A. Increase government spending on public projects
• B. Decrease government purchases of goods and services
• C. Reduce government transfer payments
• D. Raise personal income taxes

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the goal of fiscal policy in this context, which is to reduce high levels of unemployment by stimulating economic activity.
2. Step 2: Recall that fiscal policy involves government decisions on spending and taxation to influence aggregate demand in the economy.
3. Step 3: Recognize that increasing government spending on public projects directly raises aggregate demand by injecting money into the economy, leading to higher production and employment.
4. Step 4: Contrast this with other options: decreasing government purchases or reducing transfer payments would lower aggregate demand, potentially increasing unemployment; raising personal income taxes reduces consumers' disposable income, also lowering aggregate demand.
5. Step 5: Conclude that the most appropriate fiscal policy action to reduce unemployment is to increase government spending on public projects, as it directly boosts demand and job creation.