Suppose the economy is on the classical range of the aggregate supply curve and has a problem with inflation. According to Keynesian theory, which of the following is an appropriate discretionary fiscal policy to use in this situation?
A) A reduction in the money supply.
B) Less government regulation.
C) Increase federal spending.
D) Higher taxes.

Question

Quizplus · Accepted Answer

According to Keynesian theory, when the economy is on the classical range of the aggregate supply curve and facing inflationary pressures, the appropriate discretionary fiscal policy is to increase taxes. This is because higher taxes reduce disposable income, which in turn leads to a decrease in aggregate demand and helps to reduce inflationary pressures. A reduction in the money supply would be a monetary policy, not a fiscal policy, and it may not be effective in the short run. Less government regulation and an increase in federal spending may aggravate inflationary pressures, rather than reduce them.

Suppose the Economy Is on the Classical Range of the Aggregate