FISCAL POLICY AND MONETARY POLICY ON INFLATION.
FiscalPolicy- this is an increae in taxation (direct) an/or reduce government spending.
- If the taxation rises it reduces sending (conumption)as consumers have less disposable incomes.
- This reduces investment by firms as they are taxed more on their profits.
- This will reduce AD (Agregate Demand) causing prices to fall as firms are forced to reduce prces due to lower demand.
- However this reduces economic growth as firms produce less and unemployment rises.
A rise in interest rates reduces consumer spending on mortgages/credit cards become more expensive.
- As loans become more expensive it causes less dissposable income (DI) to spend on luxury items.
- Consumers will want to save more given the rise in IR (Interest Rates)…