Economics • Economic BasicsMedium
What does the term 'Fiscal Drag' refer to in economic policy?
A. The delay between the implementation of a fiscal policy measure and its actual impact on the economy.
B. The process where progressive taxation pushes individuals into higher tax brackets due to inflation, reducing their real disposable income.✓ Correct Answer
C. The mandatory reduction in public capital expenditure during severe balance of payment crises.
D. The burden of servicing public debt on future generations.
💡 Solution & Explanation
Fiscal drag occurs when inflation elevates nominal incomes, automatically shifting taxpayers into higher tax brackets under a progressive taxation system, which can inadvertently curtail consumer spending and aggregate demand. Governments sometimes adjust tax brackets to offset this phenomenon and maintain household purchasing power. Economics syllabi for civil services examinations routinely incorporate concepts related to taxation policies and inflation.
More Economics Economic Basics questions
- In welfare economics, the condition known as 'Kaldor-Hicks Efficiency' permits which of the following…
- In microeconomics, the 'Market for Lemons' paper by George Akerlof illustrates which of the following…
- Which economic law famously states that 'Supply creates its own demand', serving as a core foundation for…
- Which of the following describes 'Moral Hazard' in information economics?
- What does the 'Heckscher-Ohlin Model' in international trade theory identify as the fundamental determinant…