If the economy is at equilibrium above potential output, there is a(n) _____ gap, and _____ fiscal policy is appropriate.
A) recessionary; expansionary
B) inflationary; contractionary
C) recessionary; contractionary
D) inflationary; expansionary

Question

Quizplus · Accepted Answer

When the economy is at equilibrium above potential output, it indicates an overheating economy, leading to inflationary pressures. In such a scenario, contractionary fiscal policy is appropriate to cool down the economy by reducing spending or increasing taxes, hence the term "inflationary gap" and the appropriateness of "contractionary" fiscal policy.

If the Economy Is at Equilibrium Above Potential Output, There