Suppose that the economy is experiencing both an inflationary gap and a budget surplus.Which of the following is true?
A)Attempts to balance the budget would be pro-cyclical.
B)Attempts to balance the budget would be counter-cyclical.
C)Attempts to balance the budget would eliminate or reduce the size of the gap.
D)Reducing the size of the gap would reduce the surplus.

Question

Quizplus · Accepted Answer

Attempts to balance the budget would be pro-cyclical because the government would be reducing spending or increasing taxes during a time when the economy is already experiencing an inflationary gap. This would further increase inflation and worsen the gap.

Suppose That the Economy Is Experiencing Both an Inflationary Gap