Final answer:
To fight inflation, the government can d) raise taxes, decreasing consumer spending and reducing inflationary pressures. Adding unemployment insurance, lowering taxes, and increasing government spending can exacerbate inflation, as these measures increase aggregate demand.
Step-by-step explanation:
The government can fight inflation by implementing policies that aim to reduce aggregate demand or slow down the economy. One effective way to do this is by raising taxes. When taxes are increased, consumers have less disposable income, which leads to a decrease in consumer spending. This reduction in the overall demand can help to cool down an overheated economy and reduce inflationary pressures.
In contrast, adding more unemployment insurance, lowering taxes, and increasing spending are typically strategies to combat recession rather than inflation. These actions would generally increase aggregate demand and could potentially lead to higher inflation if the economy is already at or near its full capacity.
If aggregate expenditure is greater than potential GDP, resulting in inflationary pressures, the government should seek to reduce these expenditures. This could be through reducing government spending or increasing taxes, thereby decreasing aggregate demand to a level more in line with the economy's potential output.