Question

If an economy is experiencing inflation, Group of answer choices a) aggregate demand is below full-employment and the government will increase spending and decrease taxes. b) aggregate demand is above full-employment and the government will increase spending and decrease taxes. c) aggregate demand is below full-employment and the government will decrease spending and increase taxes. d) aggregate demand is above full-employment and the government will decrease spending and increase taxes.

Answer 1

If an economy is experiencing inflation, aggregate demand is above full-employment and the government will increase spending and decrease taxes.

Answer: Option B

Explanation:

The inflationary gap occurs when total demand is greater than the level of the outcome at full employment. Therefore, inflationary gap is the estimation of the excess amount of total demand over total supply at full employment. The hike in the amount of discretionary income for both consumers and business results from the government’s expansionary fiscal policy.

When government or pivotal authority slit taxes the investment for capital improvement, new hiring or employee’s payment reimbursement is processed by businesses and consumers may spend more for buying goods. The government can also encourage economy by investing in infrastructure projects. Such actions can result in a price hike due to the high demand for goods and services.