Question

The concept of "fiscal drag" occurs when:

• A. Government spending increases without a corresponding rise in tax revenue, leading to a budget deficit.
• B. Inflation causes the value of money to decrease, reducing the real return on investments.
• C. Wages increase due to inflation, pushing people into higher tax brackets and increasing tax revenue for the government.
• D. The government lowers taxes during an economic downturn to stimulate spending.

Answer 1

Answer:

C. Wages increase due to inflation, pushing people into higher tax brackets and increasing tax revenue for the government.

• Fiscal drag happens when inflation-induced income increases push taxpayers into higher tax brackets, leading to an increase in real tax burden without a change in real income.