Suppose an economy is operating with an inflationary gap. In this case, policymakers would
Seek to move the economy
A) back down the Phillips curve toward an unemployment rate that is closer to the natural rate of unemployment.
B) up the Phillips curve toward an unemployment rate that is closer to the natural rate of unemployment.
C) back down the Phillips curve toward an unemployment rate that is further from the natural rate of unemployment.
D) up the Phillips curve toward an unemployment rate that is further from the natural rate of unemployment.

Question

Quizplus · Accepted Answer

To address an inflationary gap, policymakers would seek to reduce inflation by reducing aggregate demand, which can be achieved by decreasing government spending or increasing taxes. This would shift the economy down the Phillips curve toward a lower rate of inflation and a higher unemployment rate, closer to the natural rate of unemployment.

Suppose an Economy Is Operating with an Inflationary Gap