Question

What is the logic behind increasing income tax at the time of inflation?

• A. People will have more money to spend, which will increase the demand for goods. This will decrease the price level.
• B. People will have less money to spend, which will increase the demand for goods. This will increase the price level.
• C. People will have less money to spend, which will decrease the demand for goods. This will decrease the price level.
• D. People will have more money to spend, which will increase the demand for goods. This will increase the price level.

Answer 1

The correct option is C People will have less money to spend, which will decrease the demand for goods. This will decrease the price level.

When the income tax is increased, people have less money to spend. This reduces the demand for goods and services. Lower demand tends to decrease the general price level. Thus, inflation can be reduced by increasing income tax.