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Question : 8
Total: 18
Explain the role of taxation in reducing excess demand.
Solution:
Role of taxation to reduce excess demand: Important part of fiscal policy is revenue policy which is expressed in terms of taxes. During inflation, government should raise rates of all taxes especially on rich people because taxation withdraws purchasing power from the tax payers and to that extent reduces effective demand. The non-discretionary elements refer to in built stabilizers of income which operate automatically in reducing excess demand like progressive income tax, subsidies, old-age pension and others such as transfer payments.
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