Question

If the economy is experiencing inflation, which of the following are correct tools the government could use?

Question 1 options:

A. The government could use fiscal policy. They would use expansionary policy by increasing taxes and government spending.


B. The government could use monetary policy. They would use contractionary policy and decrease taxes and spending.


C. The government could use fiscal policy. They would use contractionary policy by increasing taxes and decreasing government spending.


D. The government could use monetary policy. They would use expansionary policy by increasing taxes and the discount rate.

Answer 1

Inflation requires prices to rise across a "basket" of goods and services, such as the one that comprises the most common measure of price changes, the consumer price index (CPI). When the prices of goods that are non-discretionary and impossible to substitute – food and fuel – rise, they can affect inflation all by themselves. For this reason, economists often strip out food and fuel to look at "core" inflation, a less volatile measure of price changes.