Suppose you estimate that for our economy, the consumption function is C = 0.75 Y + 200, where Y represents disposable income. Currently, taxes are simple lump-sum taxes of $100. 

Suppose that officials in Congress and the Federal Reserve become convinced that an economic recovery is occurring, in fact, there are fears that a strong recovery could lead to inflation. What can government do to prevent inflation? What are some of the advantages and disadvantages of these options? What policy would you recommend?

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In the given scenario the government can decrease the spending take some austerity measures and or i... View the full answer