Question

Using fiscal policy, how is the inflationary gap reduced?

Options

• By increasing the Cash Reserve Ratio (CRR)

• By increasing the Repo rate

• By increasing tax

• By reducing government expenditure

Answer 1

Both by increasing tax and by reducing government expenditure

Explanation:

Fiscal policy reduces an inflationary gap by increasing taxes or cutting government expenditure, both of which directly lower aggregate demand by shrinking household disposable income and public spending.