Sapling Learning The government is concerned about an inflationary gap. Shift th

Question

Sapling Learning The government is concerned about an inflationary gap. Shift the appropriate curve to provide a graphical re tation of an inflationary gap and move the point, E, to the short-run equilibrium associated with the inflationary gap. LRAS Which of the following policies will help to eliminate the inflationary gap? O an increase in govenment transfers O an increase in military spending O an increase in taxes O a tax cut SRAS AD Real GDP O Previous Check Answer () Next Answer 0 Next E Hint

Explanation / Answer

Inflationery gap is simply the difference between the full employment Real GDP and the current level of GDP. Once we moved to the point E, the full employment real GDP, what we need is to push AD as well as SRAS curve to the point E. Now just think of this. Take 4 options and see what impact they will have on the consumer spendings,will we be able to increase or decrease the aggregate consumption by the consumers. So looking thus way, we can see a tax cut will surely put some money in hands of the consumer and thus consumer has more to spend. Aggregate Spendings are increased and thus AD shifts right which is matched by an equal supply by the suppliers. Increase in government spending would surely shift AD to the point E but government trasfers may or may not ensure the same effect. Government trasfers and spending are two different things.

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