The government wishes to close an inflationary gap by reducing real GDP by $400 billion. Assuming a tax multiplier of 4 and an income multiplier of 5, which of the following policy prescriptions would reduce the inflationary gap by $400 billion?
a. Decreasing government spending by $400 billion and increasing taxes by $400 billion.
b. Decreasing government spending by $160 billion and decreasing taxes by $100 billion.
c. Decreasing government spending by $40 billion and decreasing taxes by $40 billion.
d. Decreasing government spending by $80 billion and keeping taxes the same.
e. Doing absolutely nothing to the economy.
b
Economics
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Fill in the blank(s) with the appropriate word(s).
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A fixed or rigid price level implies
A) that income is fixed. B) real GDP is greater than nominal GDP. C) nominal GDP is less than real GDP. D) real GDP equals nominal GDP.
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