If the current level of GDP exceeds full employment, the level of GDP can be reduced by
A) reducing taxes.
B) increasing spending.
C) reducing the money supply.
D) lowering interest rates.

Question

Quizplus · Accepted Answer

If the current level of GDP exceeds full employment, it means that there is excess demand in the economy, leading to inflationary pressures. To reduce the level of GDP, we need to reduce demand. One way to do this is by reducing the money supply, which will increase interest rates and reduce spending in the economy. This will, in turn, reduce the level of GDP and bring it back to full employment. Reducing taxes or increasing spending will only increase demand and exacerbate the problem of inflation. Lowering interest rates will also increase demand and is therefore not a suitable option in this scenario.

If the Current Level of GDP Exceeds Full Employment, the Level