Fiscal policy to curb inflation via reduced demand

Steps:

• High inflation signals excess aggregate demand over supply.
• Government uses contractionary fiscal policy to cool the economy.
• Increasing income tax lowers disposable income for households.
• This reduces consumption spending, lowering total demand and easing inflationary pressures.

Why D is correct:

• In Keynesian economics, reducing total demand through higher taxes decreases aggregate expenditure, aligning with the formula for equilibrium output (Y = C + I + G + NX), where lower C counters inflation.

Why the others are wrong:

• A: Income taxes are general, not targeted at harmful goods like excise taxes.
• B: Revenue generation occurs but is not the primary inflation-specific response.
• C: Redistribution aims at equity via progressive rates, unrelated to inflation control.

Final answer: D