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Explain how can we use fiscal and monetary policy if we have a very high inflation...

Explain how can we use fiscal and monetary policy if we have a very high inflation rate in the country.

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Answer #1

To curb high inflation rate following policies are required :

  • Contractionary fiscal policy - Increased taxes and reduced government spending
  • Contractionary monetary policy - Increased interest rates and selling government securities through open market operations.

This both will reduce credit availability in market and thus the disposable incomes fall causing lower consumption and thus aggregate demand falls and thus real GDP and prices both decline leading to lower inflation.

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