Answer to Question #232116 in Microeconomics for Kiddo

Question

Assume that the South African economy is experiencing high inflation of above 10%.

Explain, with the use of the AD-AS model, how the Reserve Bank can reduce the inflation to its’ target range

Answer 1

Reserve Bank can reduce inflation by raising interest rates which will inturn force the banks to raise their interest rates thereby discouraging people from borrowing. The decreased spending will decreasing aggregate demand thereby shifting AD curve to the left. The price will drop from from P1 to P2.