If there were an inflationary gap,the proper government policies would involve
A) higher government purchases,lower taxes,and a higher key policy rate.
B) higher government purchases,higher taxes,and a higher key policy rate.
C) lower government purchases,higher taxes,and a higher key policy rate.
D) lower government purchases,lower taxes,and a lower key policy rate.
E) higher government purchases,lower taxes,and a lower key policy ratE.

Question

Quizplus · Accepted Answer

In an inflationary gap, there is excess demand in the economy leading to inflation. To counter this, the government should implement contractionary fiscal and monetary policies. Choice C is the appropriate option as lower government purchases decrease aggregate demand, higher taxes reduce disposable income, and higher key policy rate reduces borrowing and spending. This would decrease aggregate demand and reduce inflation. Higher government purchases (options A and E) would increase aggregate demand and worsen the inflationary gap. Higher taxes (option B) would also reduce aggregate demand but would also reduce the disposable income of households and have adverse effects on their consumption. Finally, lower taxes and a lower key policy rate (option D) would increase aggregate demand and worsen the inflationary gap.

If There Were an Inflationary Gap,the Proper Government Policies Would