Policies that can reduce an inflationary gap include reductions in government spending , tax increases, bond and securities issues, interest rate increases, and transfer payment reductions.
Which of the following might the government choose to increase in order to close an inflationary gap?
The government should increase taxes in order to close the inflationary gap.
What are the fiscal policy options to reduce an inflationary gap quizlet?
A contractionary fiscal policy prescription or raising taxes and/or decreasing government spending will help to reduce aggregate demand and thus reduce the inflationary gap.
What happens during an inflationary gap?
When an inflationary gap occurs, the economy is out of equilibrium level, and the price level of goods and services will rise (either naturally or through government intervention) to make up for the increased demand and insufficient supply —and that rise in prices is called demand-pull inflation.
Which of the following is true of an inflationary gap?
The correct answer is It leads to demand-pull Inflation . Inflation refers to the rise in the prices of most goods and services of daily or common use. ... An inflationary gap is a type of economic gap where a country’s real gross domestic product (GDP) is higher than its potential gross domestic product (GDP).
When the government reduces income taxes it is trying to stimulate?
7 As you would expect, lowering taxes raises disposable income , allowing the consumer to spend additional sums, thereby increasing GNP. Reducing taxes thus pushes out the aggregate demand curve as consumers demand more goods and services with their higher disposable incomes.
Which of the following reduces household and business spending?
Which of the following reduces household and business spending? Taxes that restrain economic expansion . Tax revenues automatically rise and the budget moves from deficit toward surplus as the economy moves toward a higher: ...
In which of the following ways can fiscal policy be used to correct an inflationary gap quizlet?
In which of the following ways can fiscal policy be used to correct an inflationary gap? A government’s response to correct an inflationary gap should be an increase in spending . When an inflationary gap occurs, the government should decrease spending to lower aggregate demand.
What policy could the government use to close an inflationary gap a decrease taxes b increase taxes C increase government spending D None of the above?
Fiscal policy means using either taxes or government spending to stabilize the economy. Expansionary fiscal policy can close recessionary gaps (using either decreased taxes or increased spending) and contractionary fiscal policy can close inflationary gaps (using either increased taxes or decreased spending).
Which of the following would help eliminate a recessionary gap quizlet?
Deliberate adjustments in the level of government spending and taxation in order to close recessionary or inflationary gaps. Which of the following would help eliminate a recessionary gap? An increase in investment .
Which of the following measure is adopted to reduce inflation?
9. Which of the following measure is adopted to reduce inflation? Explanation: Reduction in government expenditure reduces the supply of money in the economy , which further reduces inflation.
What can the government do to fix a recessionary gap?
Policymakers may choose to implement a stabilization policy (expansionary policy) to close the gap and increase real GDP . Monetary authorities might increase the amount of money in circulation in the economy by lowering interest rates and boosting government spending.
What is a decrease in inflation?
Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation’s gross domestic product over time.
How do you fix an inflationary gap?
For the gap to be considered inflationary, the current real GDP must be higher than the potential GDP . Policies that can reduce an inflationary gap include reductions in government spending, tax increases, bond and securities issues, interest rate increases, and transfer payment reductions.
What is inflationary gap quizlet?
Inflationary gap is when real GDP is greater than natural real GDP . Unemployment rate is less in a natural unemployment rate. Long-run equilibrium is when real GDP equals natural real GDP.
What is inflationary gap and deflationary gap?
Excess demand or inflationary gap is the excess of aggregate demand over and above its level required to maintain full employment equilibrium in the economy. Deficient demand or deflationary gap refers to the situation when aggregate demand is short of aggregate supply corresponding.
When the government reduces income taxes it is trying to stimulate Which of the following components of GDP?
A decrease in taxes has the opposite effect on income, demand, and GDP. It will boost all three, which is why people cry out for a tax cut when the economy is sluggish. When the government decreases taxes, disposable income increases . That translates to higher demand (spending) and increased production (GDP).
How does reducing government spending help the economy?
When the government raises individual income taxes , for example, individuals have less disposable income and decrease their spending on goods and services in response. The decrease in spending reduces aggregate demand for goods and services, slowing economic growth temporarily.
Which of the following policies involves decreasing government purchases and or increasing taxes?
A contractionary fiscal policy involves the decrease of government purchases and/or an increase in taxes in order to decrease aggregate demand.
What are the effects of lowering taxes and increasing government spending?
Since government spending is one of the components of aggregate demand, an increase in government spending will shift the demand curve to the right. A reduction in taxes will leave more disposable income and cause consumption and savings to increase , also shifting the aggregate demand curve to the right.
What happens when government spending decreases?
When government spending decreases, regardless of tax policy, aggregate demand decrease, thus shifting to the left . ... Thus, policies that raise the real exchange rate though the interest rate will cause net exports to fall and the aggregate demand curve to shift left.
How government spending affects the economy?
By boosting inflation and expected inflation , government spending can have the beneficial effect of lowering real interest rates and stimulating the economy further.
Which of the following are fiscal tools that a government?
The two main tools of fiscal policy are taxes and spending . Taxes influence the economy by determining how much money the government has to spend in certain areas and how much money individuals should spend.
Which of the following is an example of fiscal policy quizlet?
Which of the following is an example of a government fiscal policy? The government recently reduced corporate tax rates . Fiscal policy involves changes in taxes or spending (government budget) to achieve economic goals. Changing the corporate tax rate would be an example of fiscal policy.
Which one of the following is an example of discretionary fiscal policy used to correct an inflationary gap?
A. a tax decrease passed into law by Congress is an example of a discretionary fiscal policy used to correct a recessionary gap.
How can the government use fiscal policy to reduce inflation?
To combat inflation, the government could use contractionary fiscal policy. In this case, it might raise taxes and decrease government spending in an attempt reduce the total level of spending. Many economists suggests that monetary policy, enacted by the Federal Reserve, is more effective for reducing inflation.
Which of the following is an example of crowding out quizlet?
Which of the following is an example of crowding out? A decrease in taxes increases interest rates, causing investment to fall.
How do we define the economy’s output gap?
The output gap is an economic measure of the difference between the actual output of an economy and its potential output . Potential output is the maximum amount of goods and services an economy can turn out when it is most efficient—that is, at full capacity.
Which of the following would be considered an automatic stabilizer?
The income tax is: an automatic stabilizer because income tax revenues rise as income increases, slowing an economic expansion.
How does government use fiscal policy to control inflation?
In fiscal policy, the government controls inflation either by reducing private spending or by decreasing government expenditure, or by using both . It reduces private spending by increasing taxes on private businesses. When private spending is more, the government reduces its expenditure to control inflation.
How may the government use fiscal policy to reduce the level of unemployment?
Fiscal Policy
Fiscal policy can decrease unemployment by helping to increase aggregate demand and the rate of economic growth . The government will need to pursue expansionary fiscal policy; this involves cutting taxes and increasing government spending.
Why does government spending cause inflation?
Government spending: When the government spends more freely, prices go up . Inflation expectations: Companies may increase their prices in expectation of inflation in the near future. More money in the system: An expansion of the money supply with too few goods to buy makes prices increase.
Is decreasing inflation good?
Low inflation can be a signal of economic problems because it may be associated with weakness in the economy. When unemployment is high or consumer confidence low, people and businesses may be less willing to make investments and spend on consumption, and this lower demand keeps them from bidding up prices.
What affects inflation?
Inflation is a measure of the rate of rising prices of goods and services in an economy. Inflation can occur when prices rise due to increases in production costs , such as raw materials and wages. A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.
Which measures are followed by the government for handling inflation Mcq?
- Increase the bank rate. ...
- Employ other such open market operations to reduce the level of liquidity in the economy.
- The RBI also changes its Cash Reserve Ratio, as a tool to control the amount of money and credit in the market.
What is used to measure inflation?
The most well-known indicator of inflation is the Consumer Price Index (CPI) , which measures the percentage change in the price of a basket of goods and services consumed by households.
What is inflation explain briefly the types of inflation?
Inflation is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising. Inflation is sometimes classified into three types: Demand-Pull inflation, Cost-Push inflation, and Built-In inflation .
Which of the following policy options would not be used to eliminate an inflationary gap?
Which of the following policy options would not be used to eliminate an inflationary gap? Increase investment . The ratio of the change in GDP to an initial change in aggregate expenditures (AE) is the: spending multiplier.
Which of the following most likely occurs when an inflationary gap exists?
Which of the following most likely occurs when an inflationary gap exists? A bidding war for available goods and services . There ARE NOT more layoffs, rising inventories, or excessive saving.
When government decides to increase taxes in order to fight an inflationary gap this is?
- when government decides to increase taxes in order to fight an inflationary gap, this is: ...
- a government encounters a recessionary gap and uses expansionary fiscal policy to correct this problem.
How do you correct an inflationary gap Class 12?
- Increase in taxes: Government levies new taxes and enhances the rate of prevailing ones. ...
- Surplus budget policy: Government’s expenditure should remain less than its income.
What causes expansionary gaps?
An expansionary gap is when actual output exceeds potential output . ... Potential output is the real gross domestic product (or real GDP) that could have been produced by an economy if all the resources in the economy were fully employed – what economists call ‘full employment.
What happens inflationary gap?
When an inflationary gap occurs, the economy is out of equilibrium level, and the price level of goods and services will rise (either naturally or through government intervention) to make up for the increased demand and insufficient supply —and that rise in prices is called demand-pull inflation.
