ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -To combat inflation, the government could use contractionary fiscal policy. In this case, it might raise taxes and decrease government spending in an attempt reduce the total level of spending. Many economists suggests that monetary policy, enacted by the Federal Reserve, is more effective for reducing inflation.

Detailed explanation-2: -Monetary policy, conducted by the Federal Reserve, can raise interest rates. Or fiscal policy, controlled by the Congress and President, can adjust taxes and spending. Monetary policy is usually far better equipped to fight inflation – and manage overall macroeconomic stability – than fiscal policy.

Detailed explanation-3: -Fiscal consolidation, limiting debt The overall fiscal balance, however, affects the demand for goods and services, and inflationary pressures. A smaller deficit cools aggregate demand and inflation, so the central bank doesn’t need to raise rates as much.

Detailed explanation-4: -If inflation heats up, raising interest rates or restricting the money supply are both contractionary monetary policies designed to lower inflation.

Detailed explanation-5: -Which of the following fiscal policy actions is most likely to increase aggregate supply? An increase in government spending on infrastructure that increases private sector productivity.