Question

If an economy has an inflationary expenditure gap, the government could attempt to bring the economy back toward the full-employment level of GDP by _________ taxes or __________ government expenditures.

Answer 1

Answer: increasing taxes or decreasing government expenditure.

Explanation:

An inflationary gap occurs when the equilibrium real gross domestic product is more than the full employment level of the gross domestic product.

For the economy to come back towards full employment level of GDP, the government would have to reduce the equilibrium real GDP. This can be achieved by increasing taxes and decreasing government spending. When these are done, it leads to the decrease in the personal consumption of consumers.