If the economy is experiencing excess demand that is causing inflation,the inflationary pressures can be eliminated by reducing government spending by less than the amount of excess demand.
A government spending reduction will ultimately reduce aggregate demand by more than the reduction itself through the multiplier.Therefore,if the goal is to eliminate an inflationary gap,the government should cut spending by less than excess demand.

Question

Quizplus · Accepted Answer

This statement is true because the reduction in government spending will have a negative effect on aggregate demand, which will reduce the inflationary pressures. However, if the government reduces spending by more than the amount of excess demand, it could lead to a recession or economic contraction. Therefore, the reduction in government spending should be less than the excess demand to avoid such consequences.

If the Economy Is Experiencing Excess Demand That Is Causing