WAEC Economics Past Questions & Answers - Page 26

In fiscal policy, the government controls inflation either by reducing private spending or by decreasing government expenditure, or using both.

It reduces private spending by increasing taxes on private businesses. When private spending is more, the government reduces its expenditure to control inflation. The tax system should provide larger incentives to those who save, invest, and produce more.

Central banks have four main monetary policy tools: the reserve requirement, open market operations, the discount rate, and interest on reserves.

One way the central bank can reduce the rate at which banks lend money is by raising the interest rates bank charge on loans, this will discourage people from borrowing from commercial banks.

Inflation is simply when excess money is used in buying few goods. This could be as a result of high wages with no matching productivity. When people have excess money available for spending, their purchasing power will be high, as they will be willing to pay any amount to get goods (which are in limited supply) in this case.

The government can curtail inflation by raising the level of output/production and taking out the excess money in circulation in the economy. This is done through the sale of securities at high-interest rates. When people realize that, the government is offering to sell securities and the interest paid on the securities is high, they will be willing to buy from the government. With this, they are less money available for spending as many people may have invested their excess monies with the government through the purchase of securities.

No explanation has been provided for this answer.