Fiscal drag occurs when ?
Correct answer: A. Tax bands do not increase with inflation
- A. Tax bands do not increase with inflation
- B. Tax rates move inversely with inflation
- C. Government spending falls to reduce aggregate demand
- D. Tax banks increase with inflation
Explanation
Fiscal drag occurs when tax thresholds or bands are not adjusted with inflation, pushing taxpayers into higher brackets or increasing their real tax burden. It can raise tax revenue without an explicit increase in tax rates.
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About Public Finance
Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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