Suppose the Government Increases Taxes by More Than Is Necessary

Multiple Choice

Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following is the most likely result?

A) Equilibrium real GDP will be more than anticipated.
B) The economy will move into a recession.
C) The economy will generate a larger inflationary gap than anticipated.
D) This will not have any adverse effects on the economy, since inflation has been abated.