If there is an inflationary gap in the economy, then it is producing _____ than its full employment level of output, and the government can follow _____ fiscal policy to close the gap.

Question

Quizplus · Accepted Answer

An inflationary gap occurs when the economy is producing more than its full employment level of output, leading to upward pressure on prices. To close this gap and bring the economy back to its potential output, the government can implement a contractionary fiscal policy, which involves reducing government spending, increasing taxes, or both to decrease aggregate demand.

If There Is an Inflationary Gap in the Economy, Then