An inflationary gap can be closed with:
A) expansionary monetary policy.
B) a decrease in taxes.
C) a decrease in government purchases.
D) expansionary fiscal policy.

Question

Quizplus · Accepted Answer

An inflationary gap occurs when aggregate demand exceeds aggregate supply at the full employment level, leading to upward pressure on prices. A decrease in government purchases (C) is a form of contractionary fiscal policy, which can help reduce aggregate demand, thus helping to close the inflationary gap. Expansionary policies (A and D) would further increase aggregate demand, exacerbating the gap, and a decrease in taxes (B) is also an expansionary fiscal policy measure, which would not help close an inflationary gap.

An Inflationary Gap Can Be Closed With