How does the budget combat the situations of "Inflation" in the economy?

Decrease expenditure and increase revenue

The correct answer is Option 4: Decrease expenditure and increase revenue

Inflation is a situation where the aggregate demand is more in the economy, so in order to decrease the same contractionary policies should be adopted by the government through budget. Contractionary policies include decrease in the government expenditure so that aggregate demand can fall and inflation can be controlled.

Decrease expenditure and increase revenue: Decreasing government expenditure reduces aggregate demand, which can help control inflation. Increasing revenue (e.g., through higher taxes) can also reduce aggregate demand and help control inflation.

Here’s how other options relates to combating inflation:

• Decreases both expenditure and revenue: While decreasing expenditure can help control inflation, decreasing revenue (e.g., through tax cuts) could potentially increase aggregate demand, which may not help in controlling inflation.

• Increases both expenditure and revenue: Increasing expenditure can lead to higher aggregate demand, which could exacerbate inflation. Although increasing revenue (through taxes) might help, it is not sufficient by itself to combat inflation.

• Decrease revenue and increase expenditure: Decreasing revenue (e.g., by cutting taxes) could increase aggregate demand, which is not conducive to controlling inflation. Increasing expenditure could also add to inflationary pressures.