Answer to Question #217421 in Macroeconomics for Tammy

Question

A drastic increase in aggregate demand (AD) would be caused by increase in transfers payments and government spending which might lead future inflation. In view of this discuss 5 contractionary measures the government can adopt to reverse this situation. (10 marks)

Answer 1

Decreasing government spending-this slow economic activity as the government purchases fewer goods and services from the private sector.

Increasing taxes-this slow economic activity by decreasing individual's disposable income which may likely cause them to decrease spending on goods and services.

Decreasing bond prices and increasing interest rates to reduce money supply.

Decreasing investment to reduce money supply in the economy.