Question

how government can reduce the consumption expenditure? How decrease in consumption expenditure will affect economy with inflationary gap?

Answer 1

government can reduce consumption expenditure by increasing taxes and decreasing transfers. these transfers are generally the welfare transfers the such as unemployment insurance or social security benefits. When taxes are increased disposable income is reduced and this reduces consumption expenditure. because consumption expenditure is a part of aggregate demand its reduction will reduce aggregate demand. As a result it is going to decrease the inflationary gap.