Which of the following is an appropriate fiscal policy prescription that addresses the inflation that occurs when the economy is above potential GDP?
A) decreasing taxes to protect consumers from the effects of inflation.
B) increasing taxes to reduce aggregate demand.
C) increasing government spending to provide some of the goods that consumers can no longer afford at the higher prices.
D) decreasing government spending to cause a decrease in the demand for money.
E) increasing transfer payments to poor people, who are hurt the most by the inflation.

Question

Quizplus · Accepted Answer

Increasing taxes reduces disposable income, which lowers consumer spending and aggregate demand. This decrease in spending helps to reduce the upward pressure on prices and inflation.

Which of the Following Is an Appropriate Fiscal Policy Prescription