The government will use discretionary fiscal policy to control inflation by:

Borrowing from the public

To control inflation using discretionary fiscal policy, the government typically employs contractionary fiscal measures. In the given options, Borrowing from the public is the most suitable option. Borrowing from public will squeeze the money supply in the market thereby reducing the aggregate demand thereby controlling inflation. The other options are not correct as explained below:

Option 1: Reducing the tax rate

• This is an expansionary fiscal policy measure. It tends to increase the disposable income in the hands of individuals adding to inflationary pressure.

Option 2: Purchasing goods and services

• This is an expansionary fiscal policy measure. It increases aggregate demand and might contribute to inflation rather than controlling it.

Option 3: Increasing government spending

• This is an expansionary fiscal policy measure, similar to option 2. It also tends to boost aggregate demand and could contribute to inflation.