Which of the following is an appropriate fiscal policy for addressing the inflation that occurs when the economy is above potential GDP?
A) Decrease taxes to protect consumers from the effects of inflation.
B) Increase taxes to reduce aggregate demand.
C) Increase government spending to provide some of the goods consumers can no longer afford at the higher prices.
D) Decrease government spending so that the demand for money will fall.

Question

Which of the following is an appropriate fiscal policy for addressing the inflation that occurs when the economy is above potential GDP?  
A) Decrease taxes to protect consumers from the effects of inflation. 
B) Increase taxes to reduce aggregate demand. 
C) Increase government spending to provide some of the goods consumers can no longer afford at the higher prices. 
D) Decrease government spending so that the demand for money will fall.

Quizplus · Accepted Answer

Increasing taxes will decrease disposable income and thus decrease consumer spending, which in turn will result in a decrease in aggregate demand. This will lead to a decrease in prices and help to address inflation. Decreasing taxes or increasing spending will only increase aggregate demand and worsen inflation, while decreasing government spending may have negative effects on the economy.

Which of the Following Is an Appropriate Fiscal Policy for Addressing