Fiscal policy that can control inflation will include the use of

Step 1: Analyze the question The question asks which fiscal policy tool can control inflation. Inflation means too much money chasing too few goods, so general prices keep rising. To control it, the government must reduce total spending (aggregate demand) in the economy.

Step 2: Explain the concept Fiscal policy is the government's use of taxation and public spending to influence the economy.

• Contractionary (deflationary) fiscal policy is used to fight inflation. It involves higher taxes and/or reduced government spending.
• Expansionary fiscal policy is used to fight unemployment or recession. It involves lower taxes and/or increased government spending.

Step 3: Evaluate each option

• A. Balanced budgeting: Revenue equals expenditure. This is neutral and does not reduce demand in the economy.
• B. Tax holidays: These are periods when firms are exempt from tax to encourage investment. They increase spending and production, so they are not an anti-inflation tool.
• C. Budget deficit: Spending is greater than revenue. This puts extra money into the economy and can worsen inflation.
• D. Budget surplus: Revenue is greater than spending. The government takes more money out of circulation than it puts in, which reduces aggregate demand and helps lower inflation.

Step 4: Answer A budget surplus withdraws purchasing power from the economy, so it is the correct fiscal tool for controlling inflation.

Tip: Link the budget type to the economic problem:

• Inflation → Surplus (take money out)
• Recession/unemployment → Deficit (put money in)

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