Which of the following actions could be undertaken if the government wants to close an inflationary gap?
A) Increase taxes and reduce government spending.
B) Reduce taxes and increase government spending.
C) Increase taxes and increase government spending.
D) Reduce taxes and reduce government spending.

Question

Quizplus · Accepted Answer

When there is an inflationary gap, aggregate demand exceeds aggregate supply. To reduce aggregate demand, the government needs to decrease the amount of money in the economy. One way to do this is by increasing taxes, which reduces disposable income and therefore reduces consumption spending. Additionally, the government should reduce its own spending to further reduce aggregate demand. Therefore, option A is the correct choice as it involves both increasing taxes and reducing government spending.

Which of the Following Actions Could Be Undertaken If the Government