In response to an overheating economy, the federal government engages in _____ fiscal policy, which _____ government spending and _____ taxes.

Question

Quizplus · Accepted Answer

Overheating economy means that the economy is growing too fast and may lead to inflation. To combat inflation, the government needs to engage in contractionary fiscal policy, which reduces the aggregate demand in the economy. This can be done by either raising taxes or reducing government spending. Therefore, the correct choice is D, contractionary fiscal policy with a raise in taxes and a reduction in government spending.

In Response to an Overheating Economy, the Federal Government Engages