During period of inflation, tax rates will:

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Answer 1

The correct answer is Increase.

Key Points

Rises in prices of goods and services over a period of time in an economy are termed Inflation.
Inflation occurs when there is an excess supply of money in the market which leads to a decrease in the value of money.
Causes for inflation are:
- Decreasing Savings
- Tax Subsidies provided by the government in certain products or regulations can increase demand which results in an increased price rise.
- Increase in supply of goods
- Increase in production of good
Inflation can be controlled by increasing Tax Rates and Interest Rates.

Additional Information

Inflation is controlled by RBI and the government using Monetary policy and Fiscal Policy.
Inflation is of two types.
- Cost-Push Inflation: When the supply of goods and services decreases as a result of increasing production costs.
- Demand-Pull Inflation: When there is an increase in demand for goods and services in all four sectors of the macroeconomy. i.e. households, businesses, government, and foreign buyers.
Inflation is measured by Wholesale Price Index (WPI) and Consumer Price Index (CPI).