Chapter 13 Outline
A. Monetary Policy
1. Because inflation is a monetary phenomenon, the growth rate in the money supply must decrease if the rate of inflation is to fall.
a. Decreasing the rate of inflation can result in a redistribution of income and wealth and increases in unemployment.
B. Fiscal Policy
1. In the short run, contractionary fiscal policy can reduce the rate of inflation.
2. Over the long run, if the rate of growth in the money supply is not reduced, fiscal policy will not be able to affect inflation.
a. Policy-makers cannot indefinitely increase taxes or decrease government spending.
C. Supply-Side Policies
1. Supply-side policies increase the growth rate of aggregate supply, thereby reducing the rate of inflation.
a. Because of the difficulties associated with substantially increasing aggregate supply, supply-side policies will not have a significant effect on inflation.
D. Incomes Policies
1. Incomes policy is a governmental action, other than fiscal and monetary policy, aimed at influencing or controlling the rate of increase in prices, wages, and other forms of income.
a. The most common incomes policies are wage-price guidelines and controls.
2. The use of incomes policy is based on the view that inflation is caused by the exercise of monopoly power by labor unions and firms.
3. In general, economists oppose the use of wage and price controls.
a. These policies tend to be ineffective.
b. These policies can distort the allocation of resources.
c. These policies are costly to administer.
d. These policies may result in inequities.
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