Answer to Question 1
The statement is incorrect. An inflationary gap occurs when real GDP exceeds potential GDP. In this case, the Fed wants to decrease aggregate demand and thereby decrease real GDP. In order to decrease aggregate demand, the Fed needs to raise the federal funds rate. But when the Fed buys government securities, it lowers the federal funds rate. Therefore the proper Fed policy when it is concerned about an inflationary gap is to sell government securities and thereby raise the federal funds rate.
Answer to Question 2
C
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American Government: Roots and Reform, AP* Edition, 12th Edition
The fiscal policy to counter an inflationary gap is a(n)
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