Suppose aggregate demand is too high to bring about the Natural Real GDP level.A Keynesian policy prescription would call for a(n)_____________________ to close this inflationary gap.
A) increase in government spending
B) decrease in government spending
C) increase in taxes
D) decrease in taxes
E) b or c

Question

Quizplus · Accepted Answer

Keynesian economics suggests that to close an inflationary gap (where aggregate demand is too high), the government should either decrease its spending (to directly reduce demand) or increase taxes (to indirectly reduce demand by taking money out of consumers' hands). Both actions are aimed at reducing the aggregate demand to bring it closer to the Natural Real GDP level.

Suppose Aggregate Demand Is Too High to Bring About the Natural