An economy faces an inflationary gap.Which of the following is the appropriate government fiscal policy?

Question

Quizplus · Accepted Answer

To close an inflationary gap, the appropriate government fiscal policy would be to decrease aggregate demand. One way to do this is to increase taxes, such as the federal Goods and Services Tax (GST). This will reduce disposable income and consumption, lowering aggregate demand and inflationary pressures. The other options do not directly affect aggregate demand and are not appropriate policies for closing an inflationary gap.

An Economy Faces an Inflationary Gap