Question

A country’s inflation rate is rising sharply, and the central bank has already increased interest rates multiple times with little effect. The government is now considering a household income tax increase to curb demand. Which of the following risks should policymakers consider before implementing this approach? Select all that apply. Slower GDP growth, since lower less disposable income could lead to reduced consumer spending. Fast stabilization of prices, as tax increases tend to reduce inflation quickly. Large eventual effect on inflation if the inflation is "stagflation." Reduced government revenue, since higher taxes discourage work and investment. Potential increase in unemployment, since lower spending could lead to reduced demand for labor, increasing job losses. Minimal effect on inflation if the type of inflation is "cost-push." Time lag for policy to take effect, meaning inflation may persist before the tax increase has any impact.

          A country’s inflation rate is rising sharply, and the central bank has already increased interest rates multiple times with little effect. The government is now considering a household income tax increase to curb demand. Which of the following risks should policymakers consider before implementing this approach? Select all that apply.
Slower GDP growth, since lower less disposable income could lead to reduced consumer spending.
Fast stabilization of prices, as tax increases tend to reduce inflation quickly.
Large eventual effect on inflation if the inflation is "stagflation."
Reduced government revenue, since higher taxes discourage work and investment.
Potential increase in unemployment, since lower spending could lead to reduced demand for labor, increasing job losses.
Minimal effect on inflation if the type of inflation is "cost-push."
Time lag for policy to take effect, meaning inflation may persist before the tax increase has any impact.

Added by Jonathan T.

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