An economy is experiencing a high rate of demand-pull inflation with a positive output gap. The government wishes to reduce aggregate demand using a fiscal policy package that is budget-neutral (meaning any change in government spending on goods and services is exactly matched by an equal change in tax revenue).
Which of the following budget-neutral packages is most likely to achieve a net reduction in aggregate demand?
An increase in government spending on healthcare of £10 billion, funded entirely by an equal increase in personal income tax.
An increase in government transfer payments of £10 billion, funded by an equal increase in corporation tax.
A reduction in government spending on infrastructure of £10 billion, accompanied by an equal reduction in direct taxation.
A reduction in welfare benefits of £10 billion, accompanied by an equal reduction in public sector investment.
245 exam-style questions on AQA A Level Economics 2.5 Fiscal policy and supply-side policies, covering 2.5.1 Fiscal policy and 2.5.2 Supply-side policies. Each one has a worked solution and a mark scheme showing where the marks go.