Suppose there currently is an inflationary gap. What could the government do to bring the overall price level down?
A) nothing
B) Increase income taxes.
C) Increase government spending.
D) Reduce the nation's aggregate supply.

Question

Quizplus · Accepted Answer

To address an inflationary gap, the government can increase income taxes. This action effectively reduces disposable income, leading to a decrease in consumer spending. Lower consumer spending reduces the overall demand for goods and services, which can help lower the price level and close the inflationary gap. Increasing government spending (C) would actually exacerbate the inflationary gap by increasing demand further. Reducing the nation's aggregate supply (D) would also not help in this scenario, as it could lead to higher prices. Doing nothing (A) would not actively address the inflationary gap.

Suppose There Currently Is an Inflationary Gap