The government can use fiscal policy to reduce inflation by
A) increasing total spending.
B) modifying the tax laws to induce less personal saving.
C) increasing government expenditures.
D) increasing the budget deficit.
E) increasing the tax rate on personal income.

Question

Quizplus · Accepted Answer

Increasing the tax rate on personal income reduces the amount of disposable income available to consumers and, therefore, reduces their ability to spend. This decreases aggregate demand, which can help reduce inflationary pressures. Option A would actually increase inflation by increasing demand. Option B has no direct impact on inflation. Option C and D would both increase government spending, which can lead to inflation.

The Government Can Use Fiscal Policy to Reduce Inflation by