In 2006 and 2007 the U.S.faced an inflationary gap which would suggest the use of restrictive fiscal policy.

Question

Quizplus · Accepted Answer

An inflationary gap occurs when the aggregate demand is greater than the potential output of an economy, leading to higher prices. Restrictive fiscal policy, including decreasing government spending and increasing taxes, is typically used to decrease aggregate demand and control inflation. Therefore, in 2006 and 2007 when the U.S. faced an inflationary gap, the use of restrictive fiscal policy would have been appropriate.