Question

If the economy is experiencing excess demand that is causing inflation, the inflationary pressures can be eliminated by reducing government spending by less than the amount of excess demand.A. TrueB. False

Answer 1

Answer:

The correct answer is True.

Explanation:

Excess demand is a situation in which, for a given price, the amount that consumers want to buy is greater than the stock offered by sellers.

Otherwise, an excess of aggregate demand causes prices to rise and inflation is generated.

Well, given an excess of aggregate demand, with the intention of getting a price drop, the money supply will have to be reduced and interest rates increased, measures of a restrictive monetary policy.

The application of a restrictive monetary policy contributes to lower production and reduce inflation, although there is a possibility that it will generate a decrease in employment.

The reduction of public spending is an optimal solution to reduce possible inflationary pressures on the side of aggregate demand, said the Center for Economic Studies of the Private Sector (CEESP). Although the decline in public spending can also affect the pace of growth, it is the best way to moderate aggregate demand without additional effects and to stabilize financial markets.