Question

According to new, Japan was one of the countries that had experienced prolonged deflation in recent decades.

How can this problem be solved through taxation?

• A. Increase tax rates as it would reduce the purchasing power of people.
• B. Decrease tax rates as it would increase the purchasing power of people.
• C. Increase the tax rates first and then decrease the tax rates.
• D. Decrease the tax rates first and then increase the tax rates.

Answer 1

The correct option is B Decrease tax rates as it would increase the purchasing power of people.

Taxes are used to control price rise or inflation. Deflation is the excessive fall in the price of goods and services. To correct the situation, tax rates are reduced. This increases the purchasing power of people and so the demand increases and the prices rise. The tax rates are increased when the price rises excessively.