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how would you reduce inflation?

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    How would you reduce inflation by: fiscal, monetary and Supply side policies?
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    Both can affect inflation.
    Contractionary Fiscal Policy. (Low government spending and High taxed shifting AD back and causing inflation to drop).
    Monetary Policy. (Increase interest rate to put off consumption and investment AD shifting back and causing inflation to drop).
    Supply side policies. (Reduce cooperation tax so firms have more retained profit and can invest in increasing efficiency and international competitiveness. This would shift AS to the right causing output to increase and inflation to drop by a small margin.)
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    (Original post by dan94adibi)
    Both can affect inflation.
    Contractionary Fiscal Policy. (Low government spending and High taxed shifting AD back and causing inflation to drop).
    Monetary Policy. (Increase interest rate to put off consumption and investment AD shifting back and causing inflation to drop).
    Supply side policies. (Reduce cooperation tax so firms have more retained profit and can invest in increasing efficiency and international competitiveness. This would shift AS to the right causing output to increase and inflation to drop by a small margin.)
    The supply side policy - would it shift the SRAS or LRAS to the right?Reducing corperation tax is a Supply side fiscal policy right, therefore itd affect the SRAS?
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    (Original post by Nilsdejongh)
    The supply side policy - would it shift the SRAS or LRAS to the right?Reducing corperation tax is a Supply side fiscal policy right, therefore itd affect the SRAS?
    Yes, exactly. The economy would expand its capacity and employment is likely to rise since However supply side policy may not be ideal if you are in recession.
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    Reducing corporation tax is a fiscal policy supply side method, not a supply side policy.

    Supply side policies are focused on the LRAS so there is always a timelag issue which is important to consider. But to battle inflation, supply side policies look at deregulating the market to reduce barriers of entry and increase competition (drives down prices). Competition policies are used to ensure monopolys do not exist and also you can mention subsidies or tax relief for firms that spend money on R&D (improve productivity).
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    (Original post by Flinders87)
    Reducing corporation tax is a fiscal policy supply side method, not a supply side policy.

    Supply side policies are focused on the LRAS so there is always a timelag issue which is important to consider. But to battle inflation, supply side policies look at deregulating the market to reduce barriers of entry and increase competition (drives down prices). Competition policies are used to ensure monopolys do not exist and also you can mention subsidies or tax relief for firms that spend money on R&D (improve productivity).
    corporation tax is supply side, I'm pretty sure.
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    By letting some of the air escape.
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    At the current time there's no need to take measures to reduce inflation because it's going down itself and is mainly cost push inflation that we can't have control over anyway without also hurting growth

    Otherwise monetary is probably the best bet
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    you can reduce inflation using fiscal, its just not as efficient.
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    (Original post by dan94adibi)
    corporation tax is supply side, I'm pretty sure.
    It is a supply side fiscal policy, think of it this way, anything tax related is fiscal.
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    (Original post by dan94adibi)
    corporation tax is supply side, I'm pretty sure.
    Shouldn't be so sure. It is really both fiscal and supply side. Infact all fiscal policy is really a supply side policy. Taxation must be taking money from somewhere. And government spending must be producing something.
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    Using supply side policies provides non-inflationary growth within an economy.
    This is because as the AS line shifts further to the right (symbolizing more supply potential) the equilibrium moves to a lower point, meaning prices are lower.
    However, you could also reduce inflation by running a budget surplus, in order to take money directly from the economy.
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    (Original post by Nilsdejongh)
    How would you reduce inflation by: fiscal, monetary and Supply side policies?
    A key point to consider is the cause of the inflation. If, for example, inflation is caused by a dramatic rise in oil-prices, and the government pursues contractionary fiscal policy, this is only likely to harm the economy, particularly if the oil prices stabilise again, and such a policy measure has already been used.

    Therefore, for any evaluation, I would suggest you address the cause of inflation, before suggesting the most suitable policy (if any).
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    (Original post by joenye)
    A key point to consider is the cause of the inflation. If, for example, inflation is caused by a dramatic rise in oil-prices, and the government pursues contractionary fiscal policy, this is only likely to harm the economy, particularly if the oil prices stabilise again, and such a policy measure has already been used.

    Therefore, for any evaluation, I would suggest you address the cause of inflation, before suggesting the most suitable policy (if any).
    This answer is the best.

    Inflation can be caused by a number of different factors:

    1. Aggregate demand increasing faster than aggregate supply

    2. Money supply increasing faster than output

    3. Supply shortages in specific markets that account for a large amount of consumer spending (eg oil, gas, food)

    4. Exchange rate depreciation meaning imports are more expensive

    If inflation is being caused by 1 then the telltale sign will be that inflation will be being driven by wage inflation. Consumer demand for goods is rising too quickly for the economy to cope, the supply potential to satisfy that demand is not there so input prices of capital, raw materials and labour are rising fast as firms try to bid each other up for those scarce resources to try and satisfy output that is beyond their capacity. The solution is to reduce demand either through contractionary fiscal policy or contractionary monetary policy.

    If inflation is being caused by 2 then basically you have got too much money floating around relative to the amount of goods and services that money is being used for so the price level adjusts. The solution here is contractionary monetary policy which will entirely cure the problem. Hyperinflations are usually caused because you have this situation but the reason money supply is growing so fast is because the government has a fiscal deficit that it can't plug by borrowing in the usual way (because people won't lend to it) so the government is printing money to meet payments, so you can't use contractionary monetary policy.

    If inflation is being caused by 3 then the government may not be able to do anything if it is not a main producer of the goods concerned and is a large net importer. If they tax the good then they may be able to mitigate the price rise of that good by reducing the tax on it but this has revenue implications so is not always easy. But this is the hardest form of inflation to cure. This is why inflation has been higher in the past couple of years in the UK, because it's been driven by oil, energy and food prices, and increasing interest rates wouldn't influence those markets except through appreciating the exchange rate and so making imports cheaper.

    It's unlikely a lot of inflation will be caused by 4 but contractionary monetary policy can help with this as it will drive up the interest rate and so drive up the exchange rate. 4 might have its effects mainly through 3 if the country concerned is a large net importer of those goods like oil, gas and food.

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