ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The government will increase taxes to bring down aggregate demand, and therefore, the price level in the economy.

Detailed explanation-2: -The most important and commonly used method to control inflation is monetary policy of the Central Bank. Most central banks use high interest rates as the traditional way to fight or prevent inflation.

Detailed explanation-3: -Inflation can be controlled by a contractionary monetary policy is one common method of managing inflation. A contractionary policy aims to reduce the supply of money within an economy by lowering the prices of bonds and rising interest rates. Thus, consumption falls, prices fall and inflation slows down.

Detailed explanation-4: -To reduce the inflationary output gap, the government uses a contractionary fiscal policy. This policy aims to reduce the gap between actual output level and potential output level. Thus, the government can raise the taxes and reduce their spending level.

Detailed explanation-5: -A government may choose to use fiscal policy to help reduce an inflationary gap, often through decreasing the number of funds circulating within the economy. This can be accomplished through reductions in government spending, tax increases, bond and securities issues, and transfer payment reductions.