Control of Inflation:

How inflation is controlled in an economy depends on the causes and the type of inflation economy is experiencing.

Use of Fiscal Policy

Fiscal policy is one of the two main macroeconomic policies used to control aggregate demand and thereby achieve economic stability. Fiscal measures relate to taxation, government expenditure and public debt management, which seek to influence the level of aggregate demand in an economy.

There are three main tools of fiscal policy viz. government spending (G), the income tax rate (t) and government transfer payments (Tr). In times of demand pull inflation these tools are used to reduce aggregate demand. All increase in tax rate, decrease in government expenditure and decline in government transfer payment will reduce aggregate expenditure in the economy. That is, there is contractionary fiscal policy.