Keynesian Approach to Combat High Inflation | Exam Question Answer

Keynesian Approach to Combat High Inflation

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Question

An economy is currently experiencing high inflation. A Keynesian would suggest which of the following to combat this:

I. Increasing interest rates.

II. Increasing tax rates.

III. Decreasing government expenditure.

IV. Raising reserve requirements.

Answers

Explanations

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A. B. C. D.

D

To control high inflation, Keynesians suggest cutting back on aggregate demand by either raising taxes or decreasing the size of the budget deficit by decreasing government expenditures. They thus recommend a restrictive fiscal policy to combat high inflation. Note that changing the reserve requirement is not an option available to the Federal government in the U.S. because the reserve requirement is set by an independent body, The Federal Reserve.

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