Suppose the economy is experiencing an inflationary gap in the short run.The advantage of using a contractionary fiscal policy rather than allowing the economy's natural adjustment process to operate is that
A)it will reduce the upward pressure on the price level that would otherwise occur.
B)if private-sector expenditures increase on their own,the policy will stabilize real GDP.
C)it will shorten what might otherwise be a long recession.
D)it will reduce the downward pressure on the price level that would otherwise occur.
E)it will close the output gap.

Question

Quizplus · Accepted Answer

Allowing the economy's natural adjustment process to operate could result in a long recession, which would ultimately close the inflationary gap, but it would also result in a significant increase in the price level. A contractionary fiscal policy could reduce the upward pressure on the price level that would otherwise occur by reducing aggregate demand. By doing so, the policy would help to stabilize the economy and lessen the length and severity of any recession that might occur.

Suppose the Economy Is Experiencing an Inflationary Gap in the Short