Which of the following fiscal policy actions would definitely cause a reduction in the size of an inflationary gap?
A)cuts in taxes and increases in government spending
B)increases in government spending
C)increases in taxes
D)cuts in taxes

Question

Quizplus · Accepted Answer

If there is an inflationary gap, it means that the economy is producing above its potential output and prices are rising. To reduce the size of the inflationary gap, the government needs to decrease aggregate demand. One way to do that is to increase taxes, which would decrease disposable income and reduce consumer spending. This, in turn, would lead to a decrease in demand for goods and services and ultimately reduce the size of the inflationary gap.

Which of the Following Fiscal Policy Actions Would Definitely Cause