ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -During a recession, the government may lower tax rates or increase spending to encourage demand and spur economic activity. Conversely, to combat inflation, it may raise rates or cut spending to cool down the economy.

Detailed explanation-2: -These are known as marginal tax rates. Inflation is an increase in the average price level compared to the previous year. Inflation tends to increase our tax burden.

Detailed explanation-3: -During inflation, the government cuts all its expenditure which acts like a ‘withdrawal’ from the circular flow of income in the economy. This reduces the purchasing power in the economy by reducing the income in the economy thus correcting inflation.

Detailed explanation-4: -In cases where demand increases due to an increase in private spending, the most effective way to manage inflation is by taxing profits. The taxation of private income decreases the disposable income in question, and also reduces consumer spending. This has the effect of reducing aggregate demand.

Detailed explanation-5: -Answer and Explanation: The correct answer is Option A. The sale of government bonds by the Federal Reserve to banks would cause a decrease in the money supply because the Fed will exchange the bonds for money. This will reduce the rate of inflation.