Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following is the most likely result?
A)Equilibrium real GDP will be more than anticipated.
B)The economy will move into a recession.
C)The economy will generate a larger inflationary gap than anticipated.
D)This will not have any adverse effects on the economy, since inflation has been abated.

Question

Quizplus · Accepted Answer

Increasing taxes by more than necessary can reduce aggregate demand excessively, potentially leading to a decrease in real GDP and pushing the economy into a recession.

Suppose the Government Increases Taxes by More Than Is Necessary