Increasing indirect taxes to boost government revenue

Steps:

• Direct taxes (e.g., income tax) remain unchanged, so no impact on personal earnings directly.
• Indirect taxes (e.g., sales tax, VAT) rise, increasing prices of goods and services.
• Higher indirect taxes generate more government revenue from consumption spending.
• This extra revenue helps close the gap between government spending and income, targeting the budget deficit.

Why C is correct:

• Budget deficit equals government expenditure minus revenue; raising indirect taxes directly increases revenue, reducing the deficit per fiscal policy definitions.

Why the others are wrong:

• A: Exchange rate value depends on interest rates and trade balances, not directly on tax type changes.
• B: Indirect taxes are regressive, burdening lower-income groups more, so they redistribute income upward, not downward.
• D: While higher indirect taxes may curb spending and inflation, the primary intent is revenue generation, not anti-inflationary effects.

Final answer: C