Question

Arrange the following in the correct sequential order, if the government of a nation is trying to curtail the situation of inflationary gap:
(i) Decrease in disposable income
(ii) Increase in taxes
(iii) Decrease in Aggregate Demand

• A. (i), (ii), (iii)
• B. (iii), (ii), (i)
• C. (ii), (iii), (i)
• D. (ii), (i), (iii)

Hint:

Inflationary gap can be controlled by contractionary fiscal policies such as increasing taxes or reducing government expenditure.

Answer 1

The Correct Option is D

To curtail the inflationary gap, the government follows these steps: 
Increase in taxes: Raising taxes reduces disposable income for consumers. 
Decrease in disposable income: As households have less money to spend, their consumption declines. 
Decrease in Aggregate Demand: Reduced spending leads to lower aggregate demand, helping to control inflation. 

Thus, the correct sequence is (ii) Increase in taxes → (i) Decrease in disposable income → (iii) Decrease in Aggregate Demand.