Question

State three measures to reduce inflationary gap.

Answer 1

Three measures to reduce the gap:- During inflationary situation, the government can take fiscal measures to reduce excess demand as follows:

• Increase in taxes: Government levies new taxes and enhances the rate of prevailing ones. It will reduce the disposable income of the people, and therefore, the aggregate demand is reduced
• Surplus budget policy: Government’s expenditure should remain less than its income
  to control the excess demand.
• Decrease in public expenditure leads to a fall in aggregate demand. This in turn
  reduces the price level of goods in the market.