Question

Out of the various ways of the financing government's investment expenditure, which one of the following is a method of inflation control?

• A. Foreign aid
• B. Deficit financing
• C. Taxation
• D. Public borrowing

Answer 1

Answer: (C)

Taxation

Taxation dampens demand. If the tax increases, an individuals expense increases as one is paying a higher proportion of your income to the government as tax. This reduces demand for goods and services. Supply cannot change immediately as firms produce on a large scale. Therefore, as supply is greater than demand, price of goods will reduce. This will eventually reduce inflation.