Which of the following fiscal policy actions would most likely cause a reduction in the size of an inflationary gap?
A) cuts in taxes and increases in government spending
B) increases in government spending
C) increases in taxes
D) cuts in taxes

Question

Quizplus · Accepted Answer

Increases in taxes reduce disposable income and therefore reduce consumption spending. This can encourage people to save and reduce the amount of money circulating in the economy, which can reduce the inflationary pressure of an overheating economy.

Which of the Following Fiscal Policy Actions Would Most Likely