To Close an Inflationary Gap Through Fiscal Policy, the Government

question 6

Multiple Choice

To close an inflationary gap through fiscal policy, the government should

• A) decrease government spending in order to increase aggregate supply.
• B) decrease government spending in order to reduce aggregate demand.
• C) reduce taxes in order to stimulate investment, and thus increase aggregate supply.
• D) increase government spending and taxes in order to both increase aggregate demand and aggregate supply.

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Definitions:

Variable Costs

Expenses that change in proportion to the volume of production or sales, including components like raw materials and direct labor costs.

Fixed Costs

Expenses that do not change with the level of goods or services produced within a certain time span.

Operating Income

The profit realized from a business's core operations, excluding deductions of interest and taxes.

Flexible Budget

A budget that adjusts or flexes with changes in volume or activity levels, providing a more useful comparison to actual costs.