Question

Fiscal drag means _________.

• A. liability of the government to meet its fiscal deficit
• B. fall in aggregate demand of the economy when people move from lower to higher tax brackets.
• C. contradiction between fiscal and monetary policy
• D. none of the above

Answer 1

The correct option is B fall in aggregate demand of the economy when people move from lower to higher tax brackets.

Fiscal drag is the negative effect of the progressive taxation that economies feel on their expansion that is the fall in the aggregate demand of the economy due to people moving from lower to higher tax brackets. It can result in deflationary pressure attributed to either lack of state spending or to excess taxation.