What would be appropriate government action to close an inflationary gap?
A)Use policy to decrease aggregate supply.
B)Use policy to decrease potential GDP.
C)Use counter-cyclical fiscal policy to decrease aggregate demand.
D)Use counter-cyclical fiscal policy to increase aggregate demand.

Question

Quizplus · Accepted Answer

The appropriate government action to close an inflationary gap is to decrease aggregate demand. Choice C recommends using counter-cyclical fiscal policy to decrease aggregate demand, so it is the best choice. The other options - decreasing aggregate supply, decreasing potential GDP, and increasing aggregate demand - would not help close an inflationary gap and might even exacerbate it.

What Would Be Appropriate Government Action to Close an Inflationary