What is a fiscal policy solution to inflation?
A fiscal policy solution to inflation would be to either
increase taxes or decrease government spending.
increase the tax rate
Can Financing expansionary fiscal policy by increasing the deficit does not generally affect interest rates or inflation?
Nii Kwaku Sowa has written: 'Policy consistency and inflation in Ghana' -- subject(s): Inflation (Finance), Fiscal policy 'Inflation management in Ghana' -- subject(s): Inflation (Finance), Monetary policy 'Impact of liberalization on key markets in sub-Saharan Africa' -- subject(s): Economic policy, Free enterprise, Free trade, Structural adjustment (Economic policy) 'The wider macroeconomic implications of fiscal policy' -- subject(s): Deficit financing, Fiscal policy 'Inflation, interest rates, and banking in Ghana' -- subject(s): Effect of inflation on, Banks…
Fiscal policy chooses government expenditure and taxes. Monetary policy chooses interest rates to reach a set inflation target and minimise the output gap. The interaction in where fiscal authorities chooses a level of government expenditure that is not consistent with its steady state. This effects the output gap/inflation and thus interest rates, hence the interaction.
Using monetary and fiscal policy: Monetary policy - Increase interest rates reduces borrowing which in turn reduces spending which reduces inflation - Reduce the supply of money by selling government bonds which are exchanged for money that is then taken out of circulation Fiscal Policy - Increase taxes which takes away peoples' disposable incomes which reduces the amount they can spend which reduces inflation - Reduce subsidies and welfare payements.
Fiscal Policy refers to the methods employed by the government to influence and monitor the economy by adjusting taxes and/or public spending. In doing so, the government aims to find a balance between lowering unemployment and reducing the inflation rate. The main tools of Fiscal Policy are changes in the composition of taxation and government spending.