Describe some of the steps used to combat inflation. What are their side effects?
What will be an ideal response?
Inflation is frequently caused by aggregate demand racing ahead too fast. Government policies that reduce demand can keep prices down and thereby reduce inflation. Some examples are reducing government spending or raising taxes, as done by the Clinton administration in the 1990s, or raising interest rates, which the Federal Reserve did in 2005–2006. Thus, fiscal or monetary policies that reduce aggregate demand can be effective anti-inflationary devices. But such policies also decrease real GDP and raise unemployment.
You might also like to view...
When a resource has a perfectly inelastic supply curve
A) the amount of economic rent for this resource is determined by its supply. B) the amount of economic rent for this resource is determined by demand for the resource. C) the amount of economic rent for this resource is determined by the government. D) there is no economic rent being earned by this resource.
Unlike the GDP deflator, the CPI does not consider goods and services purchased by business and government
a. True b. False Indicate whether the statement is true or false
The marginal propensity to consume is a measure of the additional consumption that results from a one-dollar increase in disposable income
a. True b. False Indicate whether the statement is true or false
If checkable deposits rise, it follows that the
A) required reserve ratio will fall. B) dollar amount of reserves will rise. C) dollar amount of vault cash will rise. D) required reserve ratio will rise. E) none of the above