To close an inflationary gap through fiscal policy, the government should

Question

Quizplus · Accepted Answer

To close an inflationary gap, the government should reduce aggregate demand. One way to do this is through decreasing government spending, which will reduce the amount of money flowing into the economy and thus decrease demand. Option A is incorrect because reducing government spending would decrease aggregate demand, not increase aggregate supply. Option C is incorrect because reducing taxes would increase disposable income, which would increase consumption and thus increase aggregate demand. Option D is incorrect because both increasing government spending and increasing taxes would likely increase aggregate demand, which is counterproductive when trying to close an inflationary gap.

To Close an Inflationary Gap Through Fiscal Policy, the Government