سؤال قراءة ستيب محلول — الاستنتاج (تدريب 8002)

Passage A 1) Inflation occurs when an economy grows due to increased spending. When this happens, prices rise and the currency within the economy is worth less than it was before; the currency essentially won't buy as much as it would before. 2) There are many methods used to control inflation; some work well while others may have damaging effects. For example, controlling inflation through wage and price controls can cause a recession and cause job losses. Contractionary Monetary Policy 3) One popular method of controlling inflation is through a contractionary monetary policy. The goal of a contractionary policy is to reduce the money supply economy by decreasing bond prices and increasing interest rates. This helps reduce spending because when there is less money to go around, those who have money want to keep it and save it, instead of spending it. Reserve Requirements 4) The second tool is to increase reserve requirements on the amount of money banks are legally required to keep on hand to cover withdrawals. The more money banks are required to hold back, the less they have to lend to consumers. Fiscal Policy 5) The government can also increase taxes (such as income tax and VAT) and cut spending. This improves the budget situation and helps to reduce demand in the economy. 6) Both these policies reduce inflation by reducing the growth of aggregate demand. If economic growth is rapid, reducing the growth of AD can reduce inflationary pressures without causing a recession. 7) If a country had high inflation and negative growth, then reducing aggregate demand would be more unpalatable as reducing inflation would lead to lower output and higher unemployment. They could still reduce inflation, but it would be much more damaging to the economy Passage B 1) For any economy, inflation is a complex phenomenon. While moderate inflation is usually good for an economy, if it goes beyond it, then it can cause a disastrous situation for the economy. The government takes different measures to control inflation of different types as explained below. Demand Pull Dilation Control 2) In order to control the demand-pull inflation, the government undertakes some monetary measures and incorporates certain changes to the fiscal policy. Monetary Measures 3) One of the commonly used measures to control inflation is controlling the money supply in the economy. If the Government decreases the supply of money, then the demand will fall, leading to a fall in prices. Therefore, the Government may decide to withdraw certain paper notes and/or coins from circulation. This decreases the money supply. 4) It is important to note that a major portion of the money supply lies with banks in the form of deposits or bank credit. Therefore, by reducing the bank's rate of lending (amount of money offered as credit), the government can considerably reduce the supply of money in the economy. Fiscal Policy Measures to Control Inflation 5) Apart from the monetary measures, the government also uses fiscal measures to control inflation. A country's fiscal policy has two essential components - government revenue and expenditure. 6) Typically, when the aggregate demand exceeds the aggregate supply, an inflationary gap arises. The Government can take these fiscal measures to control inflation: 1 Take steps to decrease the overall government expenditure and transfer payments. 2 Increase the rate of taxes causing individuals to decrease their total expenditure, leading to a decrease in demand and a drop in the money supply in the economy.