The government can close an expansionary gap by increasing the price level.

Question

Quizplus · Accepted Answer

The government cannot close an expansionary gap by simply increasing the price level. Closing an expansionary gap requires contractionary fiscal or monetary policy measures, such as increasing taxes or reducing government spending, or increasing interest rates to reduce aggregate demand and inflationary pressures. Increasing the price level, without addressing the underlying causes of the expansionary gap, may in fact worsen inflation and economic instability.

The Government Can Close an Expansionary Gap by Increasing the Price