Question 23 (1 point) The policymakers of Hohoho Mountain have identifhed that t

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Question 23 (1 point) The policymakers of Hohoho Mountain have identifhed that their economy is suffering from an inflationary gap. If they use fiscal policy to fix the problem they can increase taxes. This will cause disposable income to rise, C to rise, and AD to shift to the right. 2) they can increase G. This will cause AD to shift to the right. 3) they can decrease G. This will cause AD to shift to the left. 4) they can decrease taxes. This will cause disposable income to fall, C to fall, and AD to shift to the left. lio

Explanation / Answer

ans....
the correct option is D
Decreasing the tax or government expenditure would only result in the increase of the disposable income and this would negatively affect the situation.

Inflationary gap is situation in which the real GDP is greater than the potential GDP. So inorder to fix this a government may increase the taxes or reduce the government spending, when this action occurs the disposable income of the people will fall and the aggregate demand decreases so the AD curve will shift to the left.

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