What the government is doing to control the effects of inflation

            The government can control inflation by contraction fiscal policy, reducing spending and increase taxes during boom times. The goal of contraction fiscal policy is to close an inflationary gap, restrain the economy, and decrease the inflation rate. Contraction fiscal policy leads to a smaller government budget deficit or a larger budget surplus. When reducing taxes, it will affect the income and consumption to decrease as well as consumption is a part of AD.

            Another way that the government can control inflation is by contraction monetary policy, which is called as restrictive, or tight monetary policy. It is aim to achieve the ultimate economic objectives which are maintaining stability of domestic prices, eliminating fluctuations in productions and employment and achieving full employment. In monetary policy, it includes open market operation, required reserve ratio and discount rate.