Question

Explain how fiscal policy measures can check inflation.

Answer 1

Fiscal measures to check inflation are as follows.

1. Reducing government expenditure: If inflation is high, the government can reduce its spending thereby removing itself from competing for resources in the market (both goods and services). This is a contractionary policy that would lower prices. Also, government should reduce unnecessary government expenditure on non development activities.Such expenditure increase the purchasing power of consumer without increasing output.

2. Increasing taxation: fiscal measure to control inflation is to increase taxation and thus reducing the purchasing power of consumers.This will result in decrease in overall consumption expenditure in the economy and total money supply in circulation will decrease and inflation will be controlled.