According to the principle underlying fiscal policy, during inflation, fiscal policy should: a. expand the rate of growth of the money supply. b. stimulate economic activity by decreasing taxes, increasing government spending, or both. c. curb economic activity by reducing government spending, increasing taxes, or both. d. reduce the rate of growth in the amount of money in circulation. e. let the forces of supply and demand operate on their own.

Question

Business

Louis Koch

21 October, 15:25

According to the principle underlying fiscal policy, during inflation, fiscal policy should: a. expand the rate of growth of the money supply. b. stimulate economic activity by decreasing taxes, increasing government spending, or both. c. curb economic activity by reducing government spending, increasing taxes, or both. d. reduce the rate of growth in the amount of money in circulation. e. let the forces of supply and demand operate on their own.

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Answers (1)

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Ariel Perez · Answer 1

The correct answer is option c.

Explanation:

Inflation refers to a sustained increase in the general price level. During inflation, the government needs to adopt a contractionary policy.

Fiscal policy is a tool to make changes in economic activities through changes in government spending and tax rates.

During inflation, a contractionary fiscal policy should be adopted. Such a policy involves decreasing government activity or increasing tax rates or both.

This causes consumer spending to decrease by decreasing their purchasing power or disposable income. As a result, aggregate demand decreases.