Question

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.

Answer 1

Answer:

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.