ACTIVITY V.

There are many methods used to control inflation; some work well, while others may
have damaging effects. For example, controlling inflation through wage and price
controls can cause a recession and cause job losses.
How Can the Government Control Inflation?
 Contractionary Monetary Policy
One popular method of controlling inflation is through a contractionary monetary
policy. The goal of a contractionary policy is to reduce the money supply within an
economy by decreasing bond prices and increasing interest rates.
 Federal Funds Rate
There are three main tools to carry out a contractionary policy. The first is to
increase interest rates through the central bank. In the case of the U.S., that’s the
Federal Reserve. The Fed Funds Rate is the rate at which banks borrow money
from the government, but in order to make money, they must lend it at higher rates.
 Reserve Requirements
The second tool is to increase reserve requirements on the amount of money banks
are legally required to keep on hand to cover withdrawals. The more money banks
are required to hold back, the less they have to lend to consumers. If they have less
to lend, consumers will borrow less, which will decrease spending.
 Reducing the Money Supply
The third method is to directly or indirectly reduce the money supply by enacting
policies that encourage the reduction of the money supply. Two examples of this
include calling in debts that are owed to the government and increasing the interest
paid on bonds so that more investors will buy them.
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Source: https://www.investopedia.com/ask/answers/111314/what-methods-can-
government-use-control-inflation.asp