If the economy is experiencing an inflationary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should
A)reduce aggregate demand by cutting government spending or raising taxes.
B)reduce aggregate demand by increasing government spending or cutting taxes.
C)increase aggregate supply by cutting government spending or raising taxes.
D)increase aggregate supply by increasing government spending or lowering taxes.

Question

Quizplus · Accepted Answer

To accelerate the adjustment to the long-run equilibrium when the economy is experiencing an inflationary gap, the government should reduce aggregate demand. This can be achieved by either cutting government spending or increasing taxes. Therefore, option A is the correct choice. Option B would further increase aggregate demand and worsen the inflationary gap. Options C and D focus on increasing aggregate supply, which would not directly address the issue of excess demand and inflation.

If the Economy Is Experiencing an Inflationary Gap and the Government