ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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low consumer expectations and political intransigence in not acting until it is too late
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political factors such as the reluctance to increase taxes, consumer and business expectations that they spend to escape future price increases
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external factors that make fiscal policy conflict with external balance and social equity
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the implementation and impact lags that are unpredictable and often reflect higher cost structures due to inefficiency
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Detailed explanation-1: -However, expansionary fiscal policy can result in rising interest rates, growing trade deficits, and accelerating inflation, particularly if applied during healthy economic expansions. These side effects from expansionary fiscal policy tend to partly offset its stimulative effects.
Detailed explanation-2: -The government’s fiscal policy options for ending severe demand-pull inflation are to reduce government expenditure, increase taxes, or implement both.
Detailed explanation-3: -To counter demand pull inflation, governments, and central banks would have to implement a tight monetary and fiscal policy. Examples include increasing the interest rate or lowering government spending or raising taxes. An increase in the interest rate would make consumers spend less on durable goods and housing.
Detailed explanation-4: -The effectiveness of discretionary government spending, including its state dependence, appears to be almost entirely due to the response of consumption. The responses of both consumption and investment to discretionary tax changes are state dependent, but investment plays the larger quantitative role.