Question : By increasing the tax burden on the households, the government intends to:
Option 1: correct the situation of deficient demand
Option 2: correct the situation of the inflationary gap
Option 3: correct the situation of excess demand
Option 4: both (a) and (c)
Correct Answer: correct the situation of excess demand
Solution : The correct answer is (c) correct the situation of excess demand
Increasing the tax burden on households can help reduce excess demand in the economy. When households have higher tax obligations, they have less disposable income available for consumption and savings. This reduction in disposable income can lead to a decrease in spending and aggregate demand, helping to address the situation of excess demand.
Increasing taxes is typically used as a contractionary fiscal policy tool to cool down an overheating economy and control inflationary pressures caused by excessive aggregate demand.
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