If the economy is experiencing an inflationary gap, an increase in the budget surplus
A) will reduce the size of the inflationary gap.
B) will increase the size of the inflationary gap.
C) will cause an increase in inflation and increase aggregate supply.
D) will increase aggregate demand and will increase the price level.

Question

Quizplus · Accepted Answer

An inflationary gap occurs when aggregate demand exceeds aggregate supply, leading to rising prices and potential inflation. Increasing the budget surplus means the government is collecting more revenue than it is spending, which reduces the amount of money flowing through the economy and decreases aggregate demand. This reduction in aggregate demand will help to reduce the size of the inflationary gap and mitigate inflationary pressures.

If the Economy Is Experiencing an Inflationary Gap, an Increase