Question

When inflation begins to climb to unacceptable levels in the economy, the government should:

  

A. use expansionary fiscal policy to shift aggregate demand to the right.

   

B. use contractionary fiscal policy to shift aggregate demand to the right.

   

C. use contractionary fiscal policy to shift aggregate demand to the left.

   

D. use expansionary fiscal policy to shift aggregate demand to the left.

Answer 1

Option

C. use contractionary fiscal policy to shift aggregate demand to the left.

Fiscal policy uses taxes and government spending to stabilize the economy. If the inflation is higher than the government uses a contractionary fiscal policy to reduce it where the government uses higher taxes or lower government spending to decreases consumption which decreases aggregate demand and shifts to left. It decreases both real GDP and price level which decreases inflation.