Suppose the government increases taxes by more than is necessary to close an inflationary gap. What is the MOST likely result?
A) Equilibrium real GDP will be more than anticipated.
B) The economy will move into a recession.
C) The economy will generate a larger inflationary gap than anticipated.
D) This will not have any adverse effects on the economy, since inflation has been abated.

Question

Quizplus · Accepted Answer

Increasing taxes by more than necessary to close an inflationary gap can reduce consumer spending and investment more than intended, potentially leading the economy into a recession due to decreased aggregate demand.

Suppose the Government Increases Taxes by More Than Is Necessary