Which combination of fiscal policy actions would be most contractionary for an economy experiencing severe demand-pull inflation?
A)increase taxes and government spending
B)decrease taxes and government spending
C)increase taxes and decrease government spending
D)decrease taxes and increase government spending

Question

Quizplus · Accepted Answer

Severe demand-pull inflation occurs when there is excess demand in the economy. To counteract this, the government should use contractionary fiscal policy, which involves reducing aggregate demand. Option C, which involves increasing taxes and decreasing government spending, is the most contractionary policy combination. Increased taxes will decrease disposable income and reduce spending, while decreased government spending will decrease overall spending in the economy. Both of these actions will help to reduce aggregate demand and counter the inflation.

Which Combination of Fiscal Policy Actions Would Be Most Contractionary