Choose the correct statement.
A)When an economy is in an above full- employment equilibrium, an increase in taxes will decrease aggregate demand, but because the autonomous tax multiplier is smaller than the government expenditure multiplier, the economy will not return to potential GDP.
B)Automatic stimulus has no effect on a recessionary gap.
C)Contractionary fiscal policy can eliminate inflationary pressure.
D)Eliminating an inflationary gap is very simple - calculate the size of the gap and the size of the multiplier, then change government expenditure for an immediate decrease in real GDP.
E)When an economy is in an above full- employment equilibrium, an equal decrease in government expenditure and autonomous taxes cannot return the economy to full employment.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy, which involves reducing government spending, increasing taxes, or both, can help reduce aggregate demand. This reduction in demand can help alleviate inflationary pressures by slowing down the economy, thus helping to stabilize prices.

Choose the Correct Statement