Which of the following actions could be undertaken if the government wants to reduce an inflationary gap?
A)Increase taxes and reduce government spending.
B)Reduce taxes and increase government spending.
C)Increase taxes and increase government spending.
D)Reduce taxes and reduce government spending.

Question

Quizplus · Accepted Answer

If the government wants to reduce an inflationary gap, it needs to decrease aggregate demand. This can be achieved by either reducing government spending or increasing taxes, or both. Reducing government spending would decrease the amount of money circulating in the economy and decrease aggregate demand. Alternatively, increasing taxes would reduce people's disposable income and decrease their purchasing power, thus also reducing aggregate demand. Therefore, the best option is to increase taxes and reduce government spending (option A).

Which of the Following Actions Could Be Undertaken If the Government