An appropriate fiscal policy response when aggregate demand is growing at a faster rate than aggregate supply is to decrease the money supply.

Question

Quizplus · Accepted Answer

When aggregate demand is growing at a faster rate than aggregate supply, it indicates an inflationary gap. In such a situation, it would be appropriate to use contractionary fiscal policy measures such as increasing taxes, reducing government spending, or increasing interest rates to reduce aggregate demand and bring it back in line with aggregate supply. Decreasing the money supply is a monetary policy measure and may not be effective in addressing an inflationary gap.

An Appropriate Fiscal Policy Response When Aggregate Demand Is Growing