Question:
Which one of the following policies will close an inflationary gap?
(1) Lowers reserve requirements and increase budget deficit
(2) Raise reserve requirements and lowers the discount rate
(3) Increase the money supply, reduce government spending and decrease taxes
(4) Decrease the money supply, increase taxes and reduce government spending
(5) Decrease the money supply, decrease taxes and reduce government spending
Correct Answer:
(4)
Answer Explanation:
An inflationary gap occurs when aggregate demand exceeds full-employment output. To close it, contractionary policies are needed to reduce aggregate demand. This involves tightening monetary policy (decreasing the money supply) and tightening fiscal policy (increasing taxes and reducing government spending).
Topic: Macroeconomic Policy Year: 2022
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