ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -To counter demand pull inflation, governments, and central banks would have to implement a tight monetary and fiscal policy. Examples include increasing the interest rate or lowering government spending or raising taxes. An increase in the interest rate would make consumers spend less on durable goods and housing.

Detailed explanation-2: -A contractionary policy attempts to slow the economy by reducing the money supply and fending off inflation.

Detailed explanation-3: -Reduced inflation The inflation level is the main target of a contractionary monetary policy. By reducing the money supply in the economy, policymakers are looking to reduce inflation and stabilize the prices in the economy.

Detailed explanation-4: -Contractionary fiscal policy is designed to combat demand-pull inflation and consists of a decrease in government spending and/or an increase in taxes. It is inflationary for government to increase spending if: Correct the economy is at full employment.