If a government wants to reduce the level of inflation, it will?
ECONOMICS
JAMB 1998
If a government wants to reduce the level of inflation, it will?
- A. run a budget surplus
- B. run a budget deficit
- C. run a balanced budget
- D. borrow more money
Correct Answer: D. borrow more money
Explanation
In a period of rapid economic growth, demand in the economy could be growing faster than its capacity can grow to meet it. This leads to inflationary pressures as firms respond to shortages by putting up the price. We can term this demand-pull inflation. Therefore, reducing the growth of aggregate demand (AD) should reduce inflationary pressures.The Central bank could increase interest rates. Higher rates make borrowing more expensive and saving more attractive. with this, individuals would be discouraged from borrowing and rather be lenders so as to enjoy high return on investment.
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