Which of the following are fiscal tools to reduce inflation?
1. Reduction of subsidies
2. Raising direct taxes
Select the correct answer using the codegiven below.
Both 1 and 2
Neither 1 nor 2
Policies to reduce inflation include:
Monetary tools – The most important and commonly used method to control inflation is monetary policy of the Central Bank. Most central banks use high interest rates as the traditional way to fight or prevent inflation.
Fiscal tools – Higher income tax and lower government spending, will reduce aggregate demand, leadingto lower growth and less demand pull inflation. Raising direct taxes, leading to a reduction in realdisposable income. Reduction of subsidies is a fiscal measure that reduces inflation. High subsidies increase the fiscal deficit which is inflationary in nature. Hence, statements 1 and 2 are correct.