Final answer:
Reducing government spending as part of contractionary fiscal policy can effectively lower demand-pull inflation by decreasing aggregate demand and cooling down an overheated economy.
Step-by-step explanation:
To combat demand-pull inflation, the government can implement contractionary fiscal policy, which includes tax increases or cuts in government spending. These measures are designed to decrease aggregate demand, which in turn lowers inflationary pressures. For instance, the Whip Inflation Now initiative by Gerald Ford asked citizens to reduce their discretionary spending to influence supply and demand, helping to bring down prices.
When aggregate expenditure is greater than potential GDP, it signals an overheating economy that is likely to cause inflation. Reducing government spending can help to relieve these inflationary pressures by decreasing the total demand in the economy. However, these reductions may lead to reduced government services and could be politically contentious due to their impact on economic growth and public welfare.