Question

Fiscal measure to check inflation includes _________.

• A. increase direct tax
• B. increase indirect tax on luxury goods
• C. check public expenditure
• D. all the three

Answer 1

The correct option is D all the three

Fiscal policies refers to the measures which are directly taken by the government to check inflation and deflation in the economy. The measures to check inflation are as follows:

(i) Increase in direct tax: By increasing the direct tax, the real income of public would decrease as a result of which the purchasing power will fall which will ultimately correct inflation as there will be no excess demand in the economy.

(ii) Increase in indirect tax on luxury goods: By increasing the indirect tax on luxury goods,the demand of these goods will fall as the real income of people would be decreased as a result of which excess demand would be balanced in the economy and inflation will be corrected.

(iii) Checking Public expenditure: Government can also cut its public expenditure on developing infrastructure, health, education etc. which will decrease the money supply in the economy as a result of which real income would fall and inflation would be corrected.