Suppose the economy experiences an inflationary gap. Policymakers who believe that
Government is too big would favor which of the following policies to close the gap?

Question

Quizplus · Accepted Answer

Policymakers who believe that government is too big would favor reduction in government spending as a solution to close an inflationary gap. This is because reducing government spending will reduce the demand for goods and services, leading to a decrease in the aggregate demand, which will help to close the inflationary gap. The other options, such as increases in income tax rates, increases in corporate tax rates, and increases in interest rates, may also help to reduce aggregate demand, but they may not align with the beliefs of policymakers who think that government intervention should be minimized.

Suppose the Economy Experiences an Inflationary Gap