Question

To close an inflationary gap by employing fiscal policy, the government could: A. increase federal subsidies to state universities. B. reduce budget allocations to interstate highway maintenance. C. lower the corporate income tax rate. D. raise the average amount awarded for a disability pension.

Answer 1

Answer: B - reduce budget allocations to interstate highway maintenance

Explanation: when there's an inflationary gap in the economy, there's a partisitent rise in the general price level. To close the gap with fiscal policy, the government would aim to reduce money supply.

It's only reducing budget allocations to interstate highway maintenance that reduces money supply and therefore closes the inflationary gap.