Suppose the Government Increases Taxes by More Than Is Necessary

question 39

Multiple Choice

Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following is the most likely result?

• A)Equilibrium real GDP will be more than anticipated.
• B)The economy will move into a recession.
• C)The economy will generate a larger inflationary gap than anticipated.
• D)This will not have any adverse effects on the economy, since inflation has been abated.

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Definitions:

Abandonment

The act of voluntarily giving up a right, claim, or property without transferring it to another person and with no intention of reclaiming it.

Liquidated Damages

Damages agreed to by the parties to a contract in the event of a breach.

Custom-Make

To create or manufacture something according to specific requirements or specifications.

Dollhouse

A miniature replica of a house, often used as a child's toy, which can be furnished and decorated to simulate a household.