During an inflationary period it is appropriate for the government to pursue policies that:
A) Stimulate aggregate demand.
B) Reduce aggregate demand.
C) Make budget deficits larger.
D) Eliminate the public debt.

Question

Quizplus · Accepted Answer

During an inflationary period, the economy is already experiencing high levels of aggregate demand which is fueling the inflation. Pursuing policies that stimulate aggregate demand such as increasing government spending or cutting taxes will only worsen the inflation. Therefore, the government should pursue policies that reduce aggregate demand such as increasing interest rates, cutting government spending or increasing taxes. This will help to cool down the economy and reduce inflationary pressures.

During an Inflationary Period It Is Appropriate for the Government