If the government used counter-cyclical policy to eliminate an inflationary gap,what should it do?
A)Increase its own spending and tax rates.
B)Decrease its own spending and tax rates.
C)Increase its own spending or decrease tax rates.
D)Decrease its own spending or increase tax rates.
E)Increase its own spending but leave tax rates unchanged.

Question

Quizplus · Accepted Answer

To eliminate an inflationary gap and decrease demand-pull inflation, the government should decrease its own spending and/or increase tax rates. This will decrease the amount of disposable income and reduce aggregate demand, leading to a decrease in the price level and a closing of the inflationary gap. Choice D is the best answer as it includes both options of decreasing spending and increasing tax rates.

If the Government Used Counter-Cyclical Policy to Eliminate an Inflationary