Fiscal Expansion at Full Employment Causes Overheating Steps:

• At full employment, the economy operates at potential output with minimal cyclical unemployment.
• An increase in government spending boosts aggregate demand (AD = C + I + G + NX).
• This excess AD creates inflationary gaps, prompting central bank intervention.
• Monetary tightening raises interest rates, reducing investment and consumption, which lowers AD and increases unemployment.

Why A is correct:

• Per the crowding-out effect in macroeconomic models, expansionary fiscal policy at full employment triggers inflation, leading to higher interest rates that contract private sector activity and raise unemployment.

Why the others are wrong:

• B: Higher imports may reduce net exports but often reflect strong domestic demand, not necessarily increasing unemployment.
• C: Income tax hikes reduce disposable income and AD, but at full employment, this could be offset by policy responses without net unemployment rise.
• D: Sales tax increases similarly dampen consumption, but their impact is smaller and less likely to shift the economy from full employment.

Final answer: A