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Explain the Role of Taxation in Reducing Excess Demand. - Economics

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Explain the role of taxation in reducing excess demand.

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Solution

One of the fiscal measures to reduce excess demand is to increase taxes. The government levies new taxes and enhances the rate of prevailing ones. It will reduce the disposable income of people, and therefore, the aggregate demand is reduced. Tax has a direct impact on one’s purchasing power. This in turn affects the aggregate demand.

Concept: Problems of Excess Demand and Deficient Demand
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