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

Question

Quizplus · Accepted Answer

Increasing taxes reduces the amount of disposable income people have available to spend, which in turn decreases aggregate demand and can help control inflation. This option is the most appropriate fiscal policy as it directly targets the cause of the inflation, which is excessive aggregate demand. The other policies may have some impact on inflation but are less effective or may even exacerbate the problem.

Which of the Following Is an Appropriate Fiscal Policy to Address