The diagram shows how contractionary fiscal policy can reduce aggregate demand in an economy experiencing inflation. A government wants to reduce the rate o...
Question 1 Report
The diagram shows how contractionary fiscal policy can reduce aggregate demand in an economy experiencing inflation.
A government wants to reduce the rate of inflation. Which fiscal policy measure would be most appropriate?
Answer Details
Increasing income tax reduces consumers' disposable income, lowering consumption and aggregate demand, which helps reduce demand-pull inflation. Raising government expenditure would increase AD and worsen inflation. Reducing interest rates is a monetary policy tool, not fiscal. Lowering tariffs is a trade policy that might reduce costs slightly but is not a core fiscal measure to control inflation.
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