Question

Suppose the economy is on the classical range of the aggregate supply curve and has a problem with inflation. According to Keynesian theory, which of the following is an appropriate discretionary fiscal policy to use in this situation?

A) A reduction in the money supply
B) Less government regulation
C) Increase federal spending
D) Higher taxes

Answer 1

D) Higher taxes

Step-by-step explanation:

By increasing the taxes and reducing the spending it will reduce the demand in the economy (the goverment spending will be lower wehile the indivbiduals will have less disposable income as taxes increase)

If the economy was healty enought will lead to economic growth and reduce inflationary pressures.

If the country face a high inflation and negative growth, would end up with lower income and higher unemployment. Thus damaging to the economy without solving the inflation problem.