Question

Say you are the newly hired Federal director of fiscal policy and in this case the economy is growing rapidly , inflation is rising , and your goal is to bring inflation and growth down to “normal” rates. Name a list of steps you would take to accomplish this.

Answer 1

The following policies can be used by the Federal Director to bring down the increasing inflation rate to the nominal rates:-

Monetary Policy

I will impose greater interest rates on the loans and consumer borrowings. This initiative will discourage the loans and thus the demand of products in the market will go down which can bring the price levels back to normal. However, the negative impact of this step is that it can result in the lower economic development and this will also reduce the inflation rate I the economy.

Introduction of Tight Fiscal Policy

In this policy, I would propose to increase the tax imposed on the personal and business incomes. This will improve the government income and reduce the aggregate demand in the economy This will result in lower growth rates of GDP and a relatively low rates of inflation as a demand pull will result from the inflation.

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