ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A government wishes to reduce demand-pull inflation using fiscal policy. Which action is most consistent with this aim?
Increasing income tax rates and reducing government spending is the best answer. This contractionary fiscal policy lowers aggregate demand and so eases demand-pull inflation. Tax cuts and higher spending are expansionary, while cutting interest rates and quantitative easing are monetary policy tools that would also raise demand.
- ACutting income tax rates and increasing government spending
- BIncreasing income tax rates and reducing government spendingCorrect
- CCutting interest rates to encourage borrowing
- DIncreasing the money supply through quantitative easing
Explanation
Higher taxes reduce disposable income and lower government spending reduces demand, which eases demand-pull pressure. Option A is expansionary fiscal policy. Options C and D are expansionary monetary policy, not fiscal policy, and would increase inflation.
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