Question

Asume that the expected ınflatıon rate is constant. A positive or negative output generates inflation. When expectations are anchored. what' s the policy of Central Bank and goverment. Please explain with IS-LM-PC model

Answer 1

IS_LM_PC model mainly used to describe the obtained output behaviour of both short run as well as medium run and finally they characterize the output behaviour which is obtained.

Inflation which means increase in price.So during the inflation period spending should be reduced. This reduction will helps the economic growth in a great way.

Inorder to controll inflation money supply is reduced and this is done by increasing the interest rate so that people will be more careful with the money they have and they will not spend it unnecessarily instead of that they will try to save the money which they have. Increase the interest rate with the help of central bank so that people will not spend money unnecessarily.

The government can controll inflation by increasing the reserve requirements. That means the bank which have money have to hold them back and the bank with less money wanted to lend money for the consumers.So if the bank have less money then the consumers will borrow only less money thus spending can be reduced.

The other method to control inflation is directly or indirectly controll the money supply by introducing new policies. This all can be done by understanding the output behaviour of short run.