Question

If government policy makers were worried about the inflationary potential of the economy, which of the following would be a correct fiscal policy change?

A. Decrease consumption taxes.
B. Decrease government purchases of goods and services.
C. Increase transfer payments.
D. Increase the budget deficit.
E. None of the above.

Answer 1

A tax increase on consumer income is a correct fiscal policy change to address the inflationary potential of the economy.

Step-by-step explanation:

In a Keynesian framework, a tax increase on consumer income is a correct fiscal policy change to address the inflationary potential of the economy. This is because a tax increase on consumer income will cause consumption to fall, pushing the Aggregate Demand (AD) curve to the left, which can help reduce inflationary pressures.