IMPACT OF INFLATION
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- Fiscal Policy ToolsTaxation - increasing taxes can reduce disposable income, leading to decreased consumer spending and a lower aggregate demand. This can help curb inflation by reducing demand-pull pressures.Government spending - Decreasing government spending can also help control inflation by reducing aggregate demand. When the government spends less, there is less pressure on resources and prices are less likely to rise.
- Rederal Reserve Tools- Open Market Operations- Discount Rate- Reserve RequirementsThe Federal Reserve can use OMO to solve inflation by buying or selling government secirities to influence the money supply and interest rates. Buying securities increases the money supply and lowers interest rates, while selling securities has the opposite effect.
- Fiscal v Monetary PolicyFiscal policy is often considered more effective in adressing deep recessions or structural issues due to its direct influence on government spending and taxation, which can eaily stimulate demand or adress specific economic challenges. However, monetary policy is generally more flwxible and quicker to implement, making it perferable when it comes to changing small economic conditions or responding to short term changes in the business cycle
- Impact of Loanable Funds on AD/ASAn increase in loanable funds, commnly implemented by expansionary monetary policy, can lead to lower interest rates and increased borrowing by businesses and consumers. This rise in investment and consumption expenditure increases aggregate demand, shifting the AD curve to the right. On the other hand, a decrease in lonable funds, often resulting from contractionary monetary policy, can raise interest rates and reduce borrowing, leading to decreased investment and consumption, which shifts the AD curve to the left
- Impact of Monetary Policy on Loanable Market Funds
- Impact of Monetary Policy on Loanable Funds Market
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