During a period of persistent demand-pull inflation, an economy experiences rapid increases in the general price level driven by excess aggregate demand. Which of the following fiscal policy measures should the government adopt to stabilize the economy?
- Increase personal income tax rates and cut spending on public projectsCevap
- BReduce income tax rates and expand government expenditure on infrastructure
- CSell government treasury bills in the open market and raise commercial bank reserve requirements
- DIncrease government transfer payments to households while maintaining budget deficits
Cevap
The government should implement contractionary fiscal policy by raising direct tax rates and cutting public spending to reduce aggregate demand and cool down inflation.
The correct action is to raise personal income taxes and reduce government spending. Higher tax rates lower disposable income for consumers, which decreases private consumption expenditure. Simultaneously, reduced government spending cuts public sector demand. Together, these contractionary fiscal measures lower aggregate demand and bring inflation under control.
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Anahtar Kavram
Contractionary Fiscal Policy for Inflation Control