A government raises indirect taxes to reduce a large budget deficit. Businesses pass the tax rise on in prices. Which chain of effects is most likely?
Falling prices raise real household spending and widen the deficit
Lower tax revenue raises real household spending and removes the deficit
No change in prices reduces real household spending and widens the deficit
Rising prices reduce real household spending, while higher tax revenue may narrow the deficit
104 exam-style questions on AQA GCSE Economics 2.3 How the government manages the economy, covering 2.3.1a Fiscal policy and income and expenditure, 2.3.1b Fiscal policy and government objectives, 2.3.1c The government budget, 2.3.2a The meaning of monetary policy, 2.3.2b Uses of monetary policy, 2.3.3a Supply-side policies and their trade-offs, 2.3.3b Using supply-side policies, and 2.3.4 Policies to correct positive and negative externalities. Each one has a worked solution and a mark scheme showing where the marks go.