9. You are a member of Congress. The economy is currently experiencing an inflat

Question

9. You are a member of Congress. The economy is currently experiencing an inflationary gap. Which of the following are fiscal policies that Congress can enact in an attempt to correct the?economy?

A. A decrease in taxes and an increase in the interest rate.

B. An increase in the money supply and a decrease in the interest rate.

C. An increase in the interest rate and a decrease in the money supply.

D. None of the above.

10. You are a member of Congress. The economy is currently experiencing a recessionary gap. Which of the following are fiscal policies that Congress can enact in an attempt to correct the?economy?

A. A decrease in the interest rate and an increase in the money supply.

B. A decrease in government spending and an increase in taxes.

C. An increase in government spending and a decrease in taxes.

D. An increase in the money supply and a decrease in taxes

Explanation / Answer

9) An appropriate fiscal policy is fiscal contraction that involves a reduction in government spending and an increase in taxes. This would shift the aggregate demand to the left and eliminate the inflationary gap. Hence none of the option is true. (D)

10) An appropriate fiscal policy is fiscal expansion that involves an increase in government spending and a decrease in taxes. This would shift the aggregate demand to the right and eliminate the inflationary gap. Hence Option (C) is correct.

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