An appropriate ﬁscal policy for severe demand-pull inﬂation is
A) an increase in government spending.
B) depreciation of the dollar.
C) a reduction in interest rates.
D) a tax rate increase.

Question

Quizplus · Accepted Answer

A tax rate increase can help reduce demand by reducing disposable income and therefore reducing consumption and investment, which can help bring down prices and ultimately reduce demand-pull inflation. The other options do not directly address the issue of demand-pull inflation. An increase in government spending could potentially exacerbate inflationary pressures, depreciation of the dollar could lead to higher import prices and inflation, and a reduction in interest rates could encourage borrowing and spending, further fueling inflation.

An Appropriate ﬁScal Policy for Severe Demand-Pull Inﬂation Is