To eliminate an inflationary gap, policy-makers may pursue
A) an expansionary policy that reduces the price level.
B) a contractionary policy that decreases aggregate demand.
C) a non-intervention policy that leaves aggregate demand unaffected and increases aggregate supply.
D) an intervention policy that increases aggregate supply and decreases aggregate demand.

Question

Quizplus · Accepted Answer

To eliminate an inflationary gap, policy-makers must decrease aggregate demand which can be achieved through a contractionary policy such as increasing taxes, decreasing government spending or increasing interest rates. This will lead to a decrease in overall spending in the economy which will help reduce inflation. An expansionary policy that reduces the price level (choice A) may help to stimulate the economy but it will not directly address the issue of inflation. Choice C and D are not viable options as they focus on increasing aggregate supply which may not be an effective way to address the issue of an inflationary gap.

To Eliminate an Inflationary Gap, Policy-Makers May Pursue