Correcting High Inflation Rates Assignment

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Correcting High Inflation Rates
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CORRECTING HIGH INFLATION RATES 2
Correcting High Inflation Rates
To fix the two economic problems of inflation and unemployment, there are two primary
techniques used, which include fiscal and monetary policy (Sims, 2016). The table shows the
significant differences between fiscal and monetary policies.
Differences Fiscal Policy Monetary Policy
1. The government sets principles
and policies
.
Federal banks set principles and policies.
2. Its target is general meaning can
handle more than one problem
It only targets inflation.
Fiscal Policy
The fiscal policy is made up of the expansionary fiscal policies and the contractionary
fiscal policies. The critical term when dealing with inflation includes the expenditure multiplier,
which illustrates the total change in the aggregate production that results from an increase in
government expenditure, and it can be calculated through dividing the change in GDP by the
change in autonomous consumption. Similarly, transfer payments are a way in which the
government takes money to the public by providing grants and donations to the public. The tax
multiplier is the third component. It is how the government is increasing the people's income
while decreasing the taxes; that is why the multiplier is a negative value. It is given by the
change in revenue divided by the change in tax. This is then divided by the negative of marginal
propensity to consume by one minus marginal propensity to consume. Expansionary policy is
aimed at reducing the rates of high inflation by increasing the demand through tax reduction

CORRECTING HIGH INFLATION RATES 3
while decreasing the inflation rates. The contractionary policy increases tax rates while
eliminating much expenditure. Thus, reducing the disposable incomes of the public. The
expenditure multiplier can be used by the government to regulate the money supply. It will
reduce its expenditure, thus reducing money in circulation. Transfer payments can be used to
regulate by stopping of beginning its supply. If you reduce transfer payments, the money in
circulation also decreases. Tax multiplier is an effective tool to manipulate how you want the
circulation of the money; thus, an increase in the tax multiplier will increase the taxes, thus
reducing the amount of money in circulation.
1 4
2 2
0 3 0 0
Demand Investment Real GDP
Monetary Policy
Unlike fiscal policy, monetary policy is more specific on the purpose as it deals explicitly
with eliminating inflation. There are both expansionary and contractionary monetary policies.
The significant concepts associated with it include; the overnight interest rates. They are the rates
banks use to give and borrow money to fellow banks overnight. Secondly is the bank rate, which
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