Question

When fighting a inflation, monetary authorities can __________ (raise, lower) the rrr, __________ (raise, lower) the discount rate of interest, _________ (buy, sell) bonds, or pay ________ (more, less) interest on excess reserves being held.

From Chapter 13, when fighting inflation, Congress can use its fiscal policy tools. They can ___________ (increase, decrease) government spending, or ___________ (hike, cut) taxes.

Which policy is (monetary or fiscal) would you advocate using to fight inflation, and why?

Answer 1

Inflation is the phenomenon of general increase in the price of goods and services over a period of time. This happens because of an increase in the supply of money as more money chasing few goods. So it can be controlled by decreasing the amount of money in the economy.

When fighting a inflation, monetary authorities can raise the rrr, raise the discount rate of interest, sell bonds, or pay more interest on excess reserves being held.

From Chapter 13, when fighting inflation, Congress can use its fiscal policy tools. They can decrease government spending, or hike taxes.

Both the policies can fight the inflation depending on the situations prevailing in the economy. But according to me monetary policy is good because it doesn't forces anyone and controls the money supply by the market sources and there is no adverse effect on the economy.