Infaltion, Monetary Policy, and Fiscal Policy
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Assume that the economy has been going through a long period of demand-side inflation. The government decides to try to stop the inflation by means of restrictive monetary and fiscal policies. Should it make the required policy changes with as little fanfare as possible, or should it publicize them widely? Will it make any difference? Why or why not?
The answer should not be longer than 1 page.
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Solution Summary
The solution details what the government should do about inflation regarding its monetary and fiscal policy.
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Demand side inflation is caused in the classic economic case of 'too many dollars chasing to few goods'. A shortage of supply causes sellers to exploit the market conditions by charging higher prices to a pool of buyers willing to pay more for scarce goods.
The government can partake in one of several restrictive monetary or fiscal policies including limiting credit to banks from the central bank altogether or by raising its lending rates. Also, the government can raise taxes in an effort to slow spending. Whatever it does, if these efforts are to work, the government will serve its purpose most effectively if it does so with as much publicity as possible.
Although the restrictive monetary and fiscal policies available to the government can greatly affect inflation, the primary driver is consumer confidence. The government can raise taxes and fund rates all it wants but if consumers are confident that ...
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