Question

According to Keynes, if aggregate demand is too high and an inflationary gap is beginning to develop in the economy, fiscal policy should be contractionary. T/F

Answer 1

Answer: The correct answer is : True

Explanation: A contractionary fiscal policy prescription or raising taxes and / or decreasing government spending will help to reduce aggregate demand and thus reduce the inflationary gap. Keynesian economics is a theory of total spending on the economy and its effects on production and inflation.