If the economy is experiencing an inflationary gap in the short run, 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 increase in the budget surplus means that the government is reducing its spending, which will decrease aggregate demand. This decrease in aggregate demand will lead to a reduction in the inflationary gap as it helps to reduce the excess demand and inflationary pressure in the economy. Therefore, choice A is the correct answer.

If the Economy Is Experiencing an Inflationary Gap in the Short