If a government wants to reduce the level of inflation, it will?

A. run a budget surplus
B. run a budget deficit
C. run a balanced budget
D. borrow more money

Correct Answer:

Option B – run a budget deficit

Explanation

In a period of rapid economic growth, demand in the economy could be growing faster than its capacity can grow to meet it. This leads to inflationary pressures as firms respond to shortages by putting up the price. We can term this demand-pull inflation. Therefore, reducing the growth of aggregate demand (AD) should reduce inflationary pressures. The Central bank could increase interest rates. Higher rates make borrowing more expensive and saving more attractive. with this, individuals would be discouraged from borrowing and rather be lenders so as to enjoy a high return on investment.