How do the policies affect government objectives?

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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.

Monetary Policy-
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)

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