Homework Answers
If the economy expands past Potential real GDP, then the economy is facing an inflationary gap. This Economy can be brought back to the equilibrium at long run Aggregate Supply by increasing taxes. Increase in Taxes reduces disposable income and thus consumption expenditure. This leads to a Decrease in Aggregate Demand. Decrease in Aggregate Demand brings back Economy to Equilibrium at long run Aggregate Supply.
Thus, Option C is correct.
Option C : Increasing taxes.
Increasing money supply and decreasing interest rates will not cool down the heated up economy. Increasing food and housing prices will increasin inflation and economy will heat up further. Incresing taxes will reduce disposable income , consumption and savoings. It will cool down the economy to potential lrevel. Hence, optio C is the answer.
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If the economy expands past potential real GDP, what would be an appropriate fiscal policy to...
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