An inflationary gap caused by a demand shock can be addressed by _____ to _____.
A) raising government spending; lower the unemployment rate
B) raising taxes; lower the unemployment rate
C) lowering government spending; lower the aggregate price level
D) lowering taxes; lower the aggregate price level

Question

Quizplus · Accepted Answer

A demand shock causing an inflationary gap means that aggregate demand is exceeding aggregate supply, leading to higher prices and potentially inflation. To address this, the government can lower government spending, which can reduce overall aggregate demand and bring it back in line with aggregate supply. Lowering the aggregate price level can also help to reduce inflationary pressures caused by a demand shock. Raising government spending or lowering taxes would increase aggregate demand, exacerbating the inflationary gap. Raising taxes would also likely reduce consumer spending and aggregate demand, further worsening the gap.

An Inflationary Gap Caused by a Demand Shock Can Be