Question

Explain the role of the government budget in fighting inflationary and deflationary tendencies.

Answer 1

Government expenditure and taxes can help in fighting price fluctuations.

Inflationary tendencies emerge due to aggregate demand being higher than aggregate supply. While reducing its own expenditure government can bring down aggregate demand during inflation. During deflation, the government can increase its expenditure. To raise aggregate supply, tax concessions and subsidies can also be used.