Assume that each period's potential production increases by 4% as productivity rises. Each period, the money supply should be reduced by 4%.
One frequent strategy for managing inflation is to implement a contractionary monetary policy. By lowering bond prices and raising interest rates, a contractionary policy seeks to reduce the amount of money available in an economy. As a result, prices drop, inflation slows, and consumption declines.
Increasing interest rates in the economy and tightening monetary policy will help to lower inflation if it is too high, but they will also likely slow down economic development and increase unemployment.
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