Question

question 1

list and explain the policy tools the Federal Reserve can use to reduce inflation

question 2
list and explain the fiscal policy tools the government can use to reduce inflation

Answer 1

1) Tools Fed can adopt to control inflation

Open market operation: The most popular and important method which Fed can take to reduce their population is adoption contractionary monetary policy. They can sell bonds in the market and accept money in exchange of it which will reduce extra cash holdings of people. This will result in decrease in willingness to pay by people which result in decrease in aggregate demand in an economy. When demand falls, overall price level of goods fall which reduce the inflation rate.

Reserve requirement: Fed can raise / lower the reserve requirement. They can raise reserve requirement such as bank keep more % of every deposit made which will reduce money supply. Decrease in money supply will reduce inflation rate.

Discount rate: They can raise the discount rate such as they keep a fixed amount while making a new loan. Raising discount rate will reduce money supply which reduce inflation rate.

2) Tools government can adopt to control inflation:

Contractional fiscal policy: Government can lower their spending and raise tax such that people have less disposable income to spend on other goods. It will reduce aggregate demand and reduce overall price level in the economy.

Wage / Price control: They can put bar on the price list of a good such that it cannot be sold for more than a specific amount which will keep inflation in control.