Inflationary gaps can be cured by either cutting government expenditures or raising taxes.

Question

Quizplus · Accepted Answer

When there is an inflationary gap, it means that the aggregate demand is higher than the aggregate supply. To cure this, the government can either reduce its own expenditures to decrease the overall demand or increase taxes to decrease the disposable income of consumers and, thus, reduce their demand for goods and services.

Inflationary Gaps Can Be Cured by Either Cutting Government Expenditures