Question

As a following up activity of the former, prepare a short note on ‘Timely application of the fiscal policy during Inflation and Deflation’, by the government.

Answer 1

The tax rate is increased when there is inflation. As a result of this the purchasing power of the people falls. Tax is reduced at the time of deflation. This will increase the purchasing power of the people. As a result the demand for products increases. This results in an increase in the price of products. The timely application of fiscal policy helps the government to overcome such situations.