If there is an inflationary gap in the economy, discretionary fiscal policy will likely include action to:
A) shift aggregate demand to the right.
B) prevent the aggregate demand curve from shifting.
C) shift aggregate demand to the left.
D) shift both aggregate demand and short-run aggregate supply to the left.

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. To counteract this, discretionary fiscal policy would aim to reduce aggregate demand, which is achieved by shifting the aggregate demand curve to the left. This can be done through measures such as increasing taxes or decreasing government spending.

If There Is an Inflationary Gap in the Economy, Discretionary