Which fiscal policy action is generally contractionary during an inflationary pressure?
Correct answer: C. Reducing government expenditure or raising taxes
- A. Increasing government purchases without raising taxes
- B. Reducing taxes while maintaining government spending
- C. Reducing government expenditure or raising taxes
- D. Increasing transfer payments to households
Explanation
Reducing government spending or increasing taxes lowers aggregate demand and can help moderate inflationary pressure. Higher spending, lower taxes and larger transfers generally increase disposable income or demand, making them expansionary in the short run.
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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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