If policymakers are concerned that the economy is in danger of rising inflation because aggregate demand is increasing faster than aggregate supply, the appropriate fiscal policy response is to

Question

Quizplus · Accepted Answer

Increasing taxes is a form of contractionary fiscal policy, which can help cool down an economy that is overheating and thus reduce inflationary pressures. This is because higher taxes reduce disposable income, leading to a decrease in consumer spending, which in turn can help slow down aggregate demand growth.

If Policymakers Are Concerned That the Economy Is in Danger