Contractionary Policies to Curb Inflation

Steps:

• Identify the problem: Rising prices indicate inflation, caused by excess demand or money supply.
• Recall policy tools: Governments use monetary (interest rates) and fiscal (spending/taxes) policies to control inflation.
• Evaluate options: Seek policies that reduce aggregate demand or money supply to lower price pressures.
• Select best fit: Contractionary measures like higher rates and less spending directly target inflation.

Why C is correct:

• Increasing interest rates raises borrowing costs, reducing money supply and spending (monetary policy); decreasing government spending lowers aggregate demand (fiscal policy), both curbing inflation per Keynesian economics.

Why the others are wrong:

• A: Decreasing taxes and import quotas boost supply short-term but increase demand and protectionism, worsening inflation.
• B: Lower income taxes and interest rates expand money supply and disposable income, fueling demand-pull inflation.
• D: Withdrawing subsidies raises production costs; minimum wage hikes labor costs, both pushing prices up.

Final answer: C