Question:
An inflationary gap could be reduced by
(1) an increase in government spending.
(2) an increase in the supply of money.
(3) an increase in the income tax rate.
(4) a decrease in the Central Bank discount rate.
(5) a decrease in the statutory reserve ratio.
Correct Answer:
(3)
Answer Explanation:
An inflationary gap occurs when Aggregate Demand is too high, pushing output past full employment. To cool the economy, the government must use contractionary policies. Increasing the income tax rate reduces consumers’ disposable income, which drops consumption and shifts AD to the left, closing the gap.
Topic: Macroeconomic Policy Year: 2017
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