Contractionary fiscal policy to prevent real GDP from rising above potential GDP would cause the inflation rate to be ________ and real GDP to be ________.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question

Quizplus · Accepted Answer

Contractionary fiscal policy aims to decrease aggregate demand, which can decrease real GDP but also prevent inflation from rising above its natural level. Therefore, the inflation rate would be lower, and real GDP would be lower.

Contractionary Fiscal Policy to Prevent Real GDP from Rising Above