Question

Explain how inflation can be controlled through fiscal measures.

Answer 1

An economy experiences inflation as a result of a widespread spike in prices brought on by excess demand. Therefore, the following fiscal actions are advised to close the inflationary gap or excess demand:

1. Increase in Taxes: Tax rates should be raised to reduce people’s purchasing power.
2. Decrease Government Expenditure: The government should spend less on public works projects, health and education, law enforcement, national defence, and subsidies.
3. Reduce Deficit Financing: Limiting deficit funding is a good idea. The rate of inflation would only rise if more notes were printed.
4. Increase Public Borrowing: In order to reduce people’s purchasing power, public borrowing should be expanded.