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The government would aim to constrict money supply in the economy and impose deflationary measures.

MV = PY

Where M=Money supply, V=Velocity of spending, P=Price Level and Y=Quantity of Output.

Assuming that V and Y are constant values in the short run, by constricting M, P therefore falls, meaning disinflation would be experienced.

This could be achieved by a raising of interest rates (prompting increased saving) or increased tax (reducing average wealth). Although it could be argued that increasing interest rates attracts hot money into an economy, which would raise the exchange rate and increase MPI, which in itself is inflationary, these effects are negligible when compared to the impact that the change in rate has on spending within the domestic economy.

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15y ago

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