Question

A tsunami in Thailand destroys its tourist industry. In response, tourists who previously went to Thailand, now choose to go on vacation to China. What can the Chinese government do to prevent inflationary pressures within the Chinese economy?

Select all that apply:

increase government spending

decrease spending

increase taxes

decrease taxes




Sandy quit her job in order to tend to her ailing parents.

Ronald is currently looking for a job in engineering.

Nancy is working full-time at her company's corporate office.

Answer 1

To prevent inflationary pressures due to increased tourism, the Chinese government can decrease government spending or increase taxes, reducing aggregate demand and aligning it with potential GDP. The correct answer is option b. and c.

Step-by-step explanation:

To alleviate inflationary pressures within the Chinese economy resulting from increased tourism, the Chinese government can introduce measures to reduce aggregate expenditure or attempt to balance supply and demand. According to macroeconomic strategies, the appropriate governmental actions may include:

• Decrease spending: By cutting back on government expenditures, the overall demand within the economy could be reduced, helping to dampen inflation.
• Increase taxes: Higher taxes can decrease disposable income, which in turn may lower consumer spending and aggregate demand, contributing to reduced inflationary pressures.

While increasing government spending and decreasing taxes are also government policy tools, they are more likely to be used to stimulate an economy during a recession, rather than to cool down an overheating economy that is facing inflation.