11. Economic Performance - Inflation, Policies to reduce it

Question 1

What policy should the government use to reduce demand pull inflation?

Answer 1

Contractionary monetary policy or contractionary fiscal policy. This will reduce aggregate demand in the economy.

Question 2

What up the potential problems with the policies used by the government to reduce demand pull inflation?

Answer 2

There is a policy conflict between growth and unemployment and inflation as by reducing inflation you are likely to have a negative impact on the economy is growth and employment levels.Effectiveness of the policy will depend on the extent of the change in interest rates or exchange rate, as well as the change in government spending and taxation.

Question 3

What policy should the government use to reduced cost pull inflation?

Answer 3

The government should restrict wage rises leave a lineThey should live a corporation taxOffer subsidies to firms

Question 4

What are the potential problems with the policy is used by the government to reduce cost push inflation?

Answer 4

By offering subsidies the firms they may be seen as promoting inefficiencyBy restricting wage rises they may create and inflexible labour market

Question 5

How else could the government control inflation in the long run?

Answer 5

They could use supply-side policies to improve productivity and efficiency reducing inflation in the long run and increasing sustainable growth but this will have the typical supply-side policy problems – expensive, time lags, higher opp. Cost