Question

Given our economy is currently in an inflationary gap, this means we're producing A. (above/below) natural real GDP. A potential solution to combat inflation is for the government to pursue A (contrac

Answer 1

An inflationary gap occurs when the economy is producing above its potential GDP. To combat inflation, the government can pursue contractionary fiscal policies such as reducing government spending or increasing taxes.

Step-by-step explanation:

An inflationary gap occurs when the equilibrium output in an economy is above its potential GDP. This means that the economy is producing more than its maximum sustainable level. To combat inflation in this situation, the government can pursue contractionary fiscal policies.

A contractionary fiscal policy involves reducing government spending or increasing taxes to shift the aggregate expenditure schedule down. This helps to reduce aggregate demand and bring it back in line with the potential GDP, thus addressing the inflationary gap.