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Hey! We're learning about fiscal policies and how they affect inflation during history class. I'm super lost and I know you're good with history, so I was wondering if you could help me understand.
Yeah of course! 2 of the fiscal policies are to lower taxes or to reduce governemnt spending. Lowering taxes means reduced aggregate demand in the economy, and being able to reduce the spending means less money circulating in the economy. Both of them will help to reduce inflation when the prices are rising too fast.
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Okay that actually makes sense! My teacher mentioned them using different tools to help also?
Yes there are tools they use! OMO or Open Market Operations which is used the most, discount rate which influences how much the banks lend and borrow, and then reserve requirement which is how much banks are required to keep in reserves.
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Since OMO is the most common I assume they use it to help with inflation. But how do they use it to help with inflation?
When they use OMO they sell governement bonds so the banks pay for them with their money. It removes money from the banking system so then they aren't able to lend as much money so intrest rates will rise. Since the intrest would raise there would be less spending which reduces aggregate demand. In the end using OMO will help with the money supply and it helps reduce inflation.

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