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Also, do the opposite that is lowering tax rate controls deflation?

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    – 1muflon1
    Feb 24, 2021 at 9:26

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If the government taxes people but does not spend the money, accumulating surplus, it will decrease aggregate demand. Aggregate demand depends on consumption, which depends on disposable income and taxes reduce disposable income. A decrease in aggregate demand will decrease the price level, reducing inflation or causing deflation, if nothing else happens (see this article by Pettinger).

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  • $\begingroup$ Nice answer but it could be improved with references to sources $\endgroup$
    – 1muflon1
    Feb 24, 2021 at 10:08
  • $\begingroup$ Your first sentence talks about the money supply, but the rest is about the the impact of fiscal policy on the balance between aggregate supply and demand, which is a slightly different issue. I prefer the second part in response to this question. $\endgroup$
    – Henry
    Feb 24, 2021 at 13:50
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    $\begingroup$ @1muflon1 I added some source $\endgroup$
    – csilvia
    Feb 24, 2021 at 16:13
  • $\begingroup$ @Henry I deleted the first sentence but at our university we were taught that fiscal contraction reduces M holdings of households. I know that fiscal and monetary policy are different $\endgroup$
    – csilvia
    Feb 24, 2021 at 16:20

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