If severe demand-pull inﬂation was occurring in the economy, proper government policies would involve a government
A) budget deﬁcit, the purchase of securities in the open market, a higher discount rate, and higher reserve requirements.
B) budget deﬁcit, the sale of securities in the open market, a higher discount rate, and lower reserve requirements.
C) budget surplus, the sale of securities in the open market, a higher discount rate, and higher reserve requirements.
D) budget surplus, the purchase of securities in the open market, a lower discount rate, and lower reserve requirements.

Question

Quizplus · Accepted Answer

Severe demand-pull inflation is caused by excessive demand, which leads to an increase in the general price level. To combat this, the government needs to reduce aggregate demand. A budget surplus means the government's total revenue exceeds its expenditures, allowing the government to decrease expenditure, thus reducing aggregate demand. The sale of securities in the open market reduces the money supply, leading to a decrease in spending, which results in a decrease in aggregate demand. A higher discount rate and higher reserve requirements lead to an increase in the cost of borrowing and a decrease in the money supply, respectively, both of which decrease aggregate demand. Therefore, the correct answer is C.

If Severe Demand-Pull Inﬂation Was Occurring in the Economy, Proper