Question

Suppose the economy is at a point below its physical production possibilities frontier but above its institutional production possibilities frontier. In response to this situation, Keynesian economists may propose that government enact ________ fiscal policy to correct this ________ gap by ________ government expenditures.

Answer 1

Answer: contractionary; inflationary; decreasing

Explanation:

A contractionary fiscal policy is used in order to reduce the money that is in circulation. In this policy, the government increases tax and also cuts its spending.

The contractionary fiscal policy will be used according to Keynesian to correct the inflationary gap by decreasing the expenses of the government.