Suppose there currently is an inflationary gap. What could the government do to bring the overall price level down?
A)nothing
B)Reduce government spending.
C)Increase government spending.
D)Reduce the nation's aggregate supply.

Question

Quizplus · Accepted Answer

If the economy is in an inflationary gap, it means that there is excessive spending and demand is outstripping supply, leading to rising prices. By reducing government spending, there will be less demand in the economy, leading to a decrease in overall prices. This can be achieved through policies such as reducing transfer payments or lowering subsidies. However, if we increase government spending, it would further exacerbate the inflationary pressures in the economy, while reducing aggregate supply would only lead to fewer goods and services being produced, which would not necessarily solve the inflation problem. Therefore, B is the best option.

Suppose There Currently Is an Inflationary Gap