If the economy is experiencing inflationary boom, and the government lowers taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to
A) counteract inflation.
B) reduce the trade deficit.
C) continue inflationary pressures.
D) increase unemployment.

Question

Quizplus · Accepted Answer

The Keynesian model suggests that in an inflationary boom, the government should increase taxes and reduce spending to decrease aggregate demand and counteract inflation. However, if the government lowers taxes instead, it will increase disposable income and consumption, leading to higher aggregate demand and further inflationary pressures. Therefore, the likely effect will be to continue inflationary pressures.

If the Economy Is Experiencing Inflationary Boom, and the Government