Question

1. Coronavirus epidemic outbreak has had an untold hardship on the economy of Ghana. One of such influences was a rise in inflation rate from 7.8 percent in March, 2020 to 10.6 percent in April of the same year. Assuming this phenomenon persists; discuss the possible monetary and fiscal measures government may use to address the situation. You may use diagrams where necessary.                                                                                                                  

Answer 1

Inflation rates are set at some targets to account for the growth of an economy. When it exceeds target, the economy faces serious repurcussions like higher prices. The image below shows the inflationary gap causes when the Actual output exceeds the potential output. LRAS and SRAS represent Long Run Aggregate Supply and Short Run Aggregate Supply respectively.

The rightwards shift in the Aggregate Demand Curve is caused by the increased government expenditure and domestic consumption caused due to a surge in velocity of money. So, some of the fiscal policies to counter inflation:

• The most vital policy is to increase taxes and reduce the government expenditure. An increase in tax reduces domestic consumption as extra money from their savings goes into taxes and thereby that money is out of the market. Meanwhile, a control in government expenditure will bring down the aggregate demand as well. The below diagram shows us the scenario.

Monetary policies to curb inflation is:

• Contractionary monetary policy is deployed, meaning that the agenda is to reduce the money supply in the market. Ways to do this is increase the interest rates and government bond prices so that the consumer spending eventually drops because people are more concerned to hold on to the money and save it for the future.
• The increase in interest rates means that fewer people are willing to borrow at the moment. This means that the money supply in the market is low thereby slowing down the economic growth and ultimately inflation rate slows down.

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