If an inflationary boom exists, the appropriate fiscal policy is to:
A) increase the budget deficit.
B) increase government spending and hold taxes constant.
C) decrease government spending and/or raise taxes.
D) hold government spending constant and decrease taxes.

Question

Quizplus · Accepted Answer

When an inflationary boom exists, prices are rising rapidly and there is excess demand in the economy. Therefore, the appropriate fiscal policy is to decrease government spending and/or raise taxes in order to reduce aggregate demand and cool down the economy. This will help to stabilize prices and prevent hyperinflation. Increasing the budget deficit or government spending would only exacerbate the problem and lead to even higher inflation. Holding government spending constant and decreasing taxes would also stimulate demand and worsen the inflationary pressures.

If an Inflationary Boom Exists, the Appropriate Fiscal Policy Is