| Chapter 13 Outline |
| VI. INFLATION AND POLICY |
| 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. |