Answer:
see below
Explanation:
The government takes contractionary measures to check against rising inflation. Contractionary policies reduce liquidity in the market, thereby reducing the rate of money circulation.
Four measures that may control inflation include
1. Increasing interest rates: An increase in interest rates increases the cost of borrowing money. When the cost of money becomes expensive, firms and households reduce the borrowing rate, reducing the money supply rate. In turn, the inflation rate declines.
2. Increasing reserve requirement: Reserve is the proposition of customer discounts that commercial banks are expected to maintain at their custody at all times. Increasing the reserve requirement means banks will reduce lending, thereby reducing the money supply in the economy.
3. The open market sells: The government makes available many treasury bills and bonds for purchase in the market. It offers attractive rates that encourage banks and other institutions to buy them. Buying the treasury bills means banks will use a substantial percentage of customer deposits on treasury bills other than lending to customers. Open market sales mop up excess liquidity in the markets, reducing the rate of cash circulation.
4. Reduction of government spending: Government spending is a fiscal policy tool. The government is a big spender in an economy. If the level of spending is decreased, the money supply in the economy is reduced.
