If real GDP exceeded potential real GDP and inflation was increasing,which of the following would be an appropriate fiscal policy?
A)a decrease in the money supply and an increase in the interest rate
B)an increase in government spending
C)an increase in taxes
D)an increase in oil prices

Question

Quizplus · Accepted Answer

If real GDP exceeded potential real GDP and inflation was increasing, it indicates an overheated economy. In order to cool down the economy and decrease inflation, the appropriate fiscal policy would be to decrease aggregate demand. An increase in taxes would decrease disposable income, and therefore decrease consumption, reducing aggregate demand. This would help to bring the economy back to its potential output level and decrease inflation. Choices A, B, and D would increase aggregate demand, making the problem worse.

If Real GDP Exceeded Potential Real GDP and Inflation Was