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Question
State three measures to reduce inflationary gap.
Solution
Three measures to reduce the gap:- During inflationary situation, the government can take fiscal measures to reduce excess demand as follows:
- Increase in taxes: Government levies new taxes and enhances the rate of prevailing ones. It will reduce the disposable income of the people, and therefore, the aggregate demand is reduced
- Surplus budget policy: Government’s expenditure should remain less than its income
to control the excess demand. - Decrease in public expenditure leads to a fall in aggregate demand. This in turn
reduces the price level of goods in the market.
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