Suppose there currently is an inflationary gap. What could the government do to bring prices down?
A) Nothing.
B) Reduce government spending.
C) Increase government spending.
D) Shift the long-run aggregate supply curve.

Question

Quizplus · Accepted Answer

If there is an inflationary gap, it means that aggregate demand is higher than aggregate supply, leading to an increase in prices. By reducing government spending, the government can decrease aggregate demand and bring prices down, closing the inflationary gap. Option A is incorrect as doing nothing will only allow the inflationary gap to persist. Option C is incorrect as increasing government spending will only further increase aggregate demand and worsen the inflationary gap. Option D is also incorrect as shifting the long-run aggregate supply curve will have no immediate effect on the current inflationary gap.

Suppose There Currently Is an Inflationary Gap