Reducing Money Supply to Curb Inflation

Steps:

• Inflation occurs when too much money chases too few goods, increasing prices.
• Governments use monetary policy to control money supply and stabilize prices.
• Reducing money supply decreases purchasing power, slowing price rises.
• This targets the root cause without affecting fiscal or exchange policies directly.

Why C is correct:

• Per the Quantity Theory of Money (MV = PQ), reducing money supply (M) lowers nominal spending (PQ), decreasing inflation if velocity (V) and output (Q) remain stable.

Why the others are wrong:

• A: Reducing income tax increases disposable income, boosting demand and potentially worsening inflation.
• B: Reducing foreign exchange rate (devaluation) makes imports costlier, raising inflation via higher input prices.
• D: Reducing interest rates encourages borrowing and spending, increasing money circulation and inflation.

Final answer: C