ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -During a recession, the government may lower tax rates or increase spending to encourage demand and spur economic activity. Conversely, to combat inflation, it may raise rates or cut spending to cool down 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: -Answer and Explanation: The correct answer is Option A. The sale of government bonds by the Federal Reserve to banks would cause a decrease in the money supply because the Fed will exchange the bonds for money. This will reduce the rate of inflation.

Detailed explanation-4: -An increase in government spending is one of the factors that economists say can drive inflation. Other factors include interest rates, monetary policy, supply chain disruptions and fluctuations in demand for goods and services. Inflation can be an important consideration for investing, saving and borrowing.

Detailed explanation-5: -“Raising interest rates helps to reduce the overall level of demand and therefore, hopefully, reduces the upward pressure on prices, ” says Gapen. So why might this cause a recession? In the long run, businesses may respond to consumers purchasing fewer goods and services by reducing production, explains Gapen.