To eliminate an inflationary GDP gap, a government typically employs contractionary fiscal policy tools. The goal is to reduce overall demand in the economy to curb inflation. The options that would serve to eliminate an inflationary GDP gap include:
- A combination of both reduced government spending and higher taxes - This would decrease overall demand, helping to close the gap.
- Decrease government spending - Reducing government spending lowers overall demand in the economy.
- Raise taxes - Increasing taxes reduces disposable income for consumers, which can decrease consumption and overall demand.
The other options:
- A combination of both increased government spending and higher taxes - This would likely not help in reducing an inflationary gap and could actually worsen it.
- Decrease taxes - This would increase disposable income and potentially increase demand, worsening the inflationary gap.
- Increase government spending - This would also likely increase demand, thereby worsening the inflationary gap.
So, the correct selections are:
- A combination of both reduced government spending and higher taxes
- Decrease government spending
- Raise taxes