When an economy faces an inflationary gap, an appropriate fiscal policy is to

Question

Quizplus · Accepted Answer

When an economy faces an inflationary gap, it means that the aggregate demand is exceeding the potential output capacity of the economy, leading to high inflation. To control this inflation, the government needs to decrease its spending, which will reduce the aggregate demand and bring it back in line with the potential output level. Hence, the appropriate fiscal policy in this case is to decrease government expenditure.

When an Economy Faces an Inflationary Gap, an Appropriate Fiscal