If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy?

Question

Quizplus · Accepted Answer

In this scenario, the economy is already operating beyond its potential which is leading to an increase in inflation. Therefore, to bring down the aggregate demand in the economy, the government should opt for contractionary fiscal policy which involves a decrease in government spending or an increase in taxes. Out of the given options, the increase in taxes (choice C) is the most appropriate policy action to reduce aggregate demand and combat inflation.

If Real GDP Exceeded Potential Real GDP and Inflation Was