Question

"With an objective to reduce inflation, government may reduce public Expenditure."

Discuss the rationale behind such a step which may be taken by the Government. 

Answer 1

When the government wishes to minimise inflation, it cuts public spending. This diminishes people's purchasing power, resulting in lower consumption expenditure. Because consumption spending is a component of aggregate demand, it reduces aggregate demand in the economy, to the point where it approaches the level of aggregate supply, decreasing the overall price level in the economy. This reduces inflation.