ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The government will increase taxes to bring down aggregate demand, and therefore, the price level in the economy.

Detailed explanation-2: -To combat inflation, the government could use contractionary fiscal policy. In this case, it might raise taxes and decrease government spending in an attempt reduce the total level of spending. Many economists suggests that monetary policy, enacted by the Federal Reserve, is more effective for reducing inflation.

Detailed explanation-3: -The tools of fiscal policy also aim to stabilise the economy during various inflationary pressures. In the short term, the governments may focus on macroeconomic stabilisation by cutting taxes and increasing spending to boost a weak economy or increase taxes and reduce spending during inflation.

Detailed explanation-4: -Increasing government spending on infrastructure that further increases the private sector productivity can increase the aggregate supply.

Detailed explanation-5: -Take steps to decrease the overall Government expenditure and transfer payments. Increase the rate of taxes causing individuals to decrease their total expenditure, leading to a decrease in demand and a drop in the money supply in the economy.