How might fiscal policy be used to correct an inflationary gap?
A)The exchange rate would be adjusted to encourage imports.
B)The exchange rate would be adjusted to discourage imports.
C)The interest rate would be adjusted to encourage saving.
D)Taxes would be increased to reduce aggregate demand.

Question

Quizplus · Accepted Answer

Fiscal policy can be used to correct inflationary gaps by reducing aggregate demand through measures such as increasing taxes or cutting government spending, which reduces disposable income and spending power of consumers. This reduces demand for goods and services, which helps to bring prices down to equilibrium levels. Therefore, increasing taxes would be the best choice in this scenario.

How Might Fiscal Policy Be Used to Correct an Inflationary