Which of the following fiscal policy actions would be appropriate if the economy is experiencing an inflationary gap?
A) An increase in government spending
B) An increase in taxes
C) A decrease in interest rates
D) An increase in the money supply

Question

Quizplus · Accepted Answer

An increase in taxes would reduce disposable income and thus decrease consumption, leading to a decrease in aggregate demand and inflationary pressures. This contractionary fiscal policy would help to close the inflationary gap. The other options, such as an increase in government spending, a decrease in interest rates or an increase in the money supply, would all lead to an increase in aggregate demand and exacerbate the inflationary pressures.

Which of the Following Fiscal Policy Actions Would Be Appropriate