Question

Suppose you are the Finance Minister of a country. You found that your country has an inflation rate of 70%. This is not a desirable state of your country's economy. Which of the following will be the right steps to be taken to address this issue?

• A. Adopt fiscal policies that give money to the hands of the public
• B. Adopt fiscal policies that take money from the hands of the public
• C. Increase the income tax rate
• D. Decrease the income tax rate

Answer 1

Answer: (B), (C)

Increase the income tax rate

The general price level is increases when there is too much money in the hands of the people. So, people spend more and the demand for goods increases. To tackle this issue, we need to adopt fiscal policies that take money from the public's hands. Increasing the income tax is one such measure. As a result, people have less money to spend, and so demand reduces. This leads to a fall in price levels.