If the economy is in an inflationary gap and the government attempts to balance the budget, the effect will be to
A)counteract inflation.
B)reduce the trade deficit.
C)continue inflationary pressures.
D)increase unemployment.

Question

Quizplus · Accepted Answer

If the economy is in an inflationary gap, it means that it is producing above its potential output and there is upward pressure on prices. Balancing the budget means that the government is reducing its spending and/or increasing its revenues, which reduces aggregate demand in the economy. However, since the economy is already producing above its potential, there may still be excess demand and inflationary pressures even after the government reduces its spending. Therefore, balancing the budget may not be enough to counteract inflation and may continue the inflationary pressures.

If the Economy Is in an Inflationary Gap and the Government