When does fiscal drag take place?

Multiple choice question for Fiscal And Monetary Policy. Select an option, then review the explanation below.

Show Answers

When tax brackets remain unchanged despite inflationWhen tax rates decrease as inflation risesWhen the government reduces its expenditures to lower overall demandWhen tax bands rise in line with inflation

Explanation

Fiscal drag happens when tax brackets are not adjusted for inflation, causing taxpayers to move into higher tax rates even if their real income hasn't increased. This occurs because tax thresholds stay fixed while nominal incomes grow due to inflation.

Practice related questions from the same subject.

1.Why might a government impose taxes on certain goods or services?
2.Which statement accurately describes a regressive tax system?
3.What is the automatic effect on the government's budget balance when the economy experiences growth?
4.If the marginal tax rate is 40% and an individual's income rises from Rs 10,000 to Rs 12,000, what will be the total tax amount paid?
5.Which of the following actions aligns with a reflationary (expansionary) fiscal policy?

When does fiscal drag take place?

Explanation

More Fiscal And Monetary Policy MCQs