What is one goal of monetary policy during inflationary periods?

What is one goal of monetary policy during inflationary periods?

• A. Increase the money supply
• B. Limit spending
• C. Decrease taxes
• D. Increase government spending

Answer: (B)

One of the primary goals of monetary policy during inflationary periods is to limit spending. When inflation occurs, it indicates that prices are rising rapidly, which can erode purchasing power and destabilize the economy. By limiting spending, central banks aim to cool down the economy and mitigate inflationary pressures. This is typically achieved through various measures such as raising interest rates. Higher interest rates make borrowing more expensive, which can reduce consumer spending and business investment. As a result, limiting spending slows down the demand for goods and services, which can help stabilize prices. The other options would not align with the objective of cooling the economy during inflation. For instance, increasing the money supply would likely exacerbate inflation, as it would lead to more money chasing the same amount of goods, further driving up prices. Decreasing taxes or increasing government spending can also stimulate demand, potentially worsening inflation rather than controlling it.

One of the primary goals of monetary policy during inflationary periods is to limit spending. When inflation occurs, it indicates that prices are rising rapidly, which can erode purchasing power and destabilize the economy. By limiting spending, central banks aim to cool down the economy and mitigate inflationary pressures.

This is typically achieved through various measures such as raising interest rates. Higher interest rates make borrowing more expensive, which can reduce consumer spending and business investment. As a result, limiting spending slows down the demand for goods and services, which can help stabilize prices.

The other options would not align with the objective of cooling the economy during inflation. For instance, increasing the money supply would likely exacerbate inflation, as it would lead to more money chasing the same amount of goods, further driving up prices. Decreasing taxes or increasing government spending can also stimulate demand, potentially worsening inflation rather than controlling it.