Question

Explain the use of fiscal policy in controlling deflationary situations.

Answer 1

Prices have a propensity to decline during deflation. Therefore, the following actions can be taken to curb deflation:

1. Increase in Public Expenditure: Public spending must rise during a depression. Demand will rise as a result. A rise in demand will counteract the trend of declining prices.
2. Decrease in Taxes: Taxes should be reduced during a depression. A reduction in direct taxes, such as corporate tax and income tax, will encourage more investment and accelerate consumption.
3. Increase in Social Welfare Expenditure: The government should invest more on social welfare initiatives that can improve public welfare, such as social security, education, public health and medical services, grants, roads, canals, etc. Such expenditures by the government are considered compensating.
4. Price Support Policy: The price support policy is an additional strategy to manage deflationary tendencies. As a result, the government must implement a price support policy. The practice of maintaining fixed prices for key stocks during a downturn is known as price support policy. This technique stops the trend of declining pricing.
5. Deficit Financing: Aggregate demand may rise with further deficit financing doses. Prices will rise as a result.
6. Pump Priming: Pump priming is the process of boosting private investment by bringing new purchasing power into the revenue stream.