Monetary and Fiscal Policies

Question

Can monetary and / or fiscal policies create inflation? If so, how?

Answer 1

Print more money & lower the rate to zero.

No tax.

Answer 2

Create inflation? Arent they ways of combatting inflation to balance the economy?

Answer 3

Yes they could.

Giving tax breaks and increasing spending can definitely create inflation.  Why?  Well it involves complicated things.  But there's a simple way to tell you about it-- more money is in the economy.  Tax breaks will encourage people to spend..and government spending going up means more money will be out there being spent by the government.  That can be a good thing in that it could help lift the economy and stimulate it in a bad time.  However, it can be bad because it can cause prices to rise.  Why?  More money out there-> money loses value -> inflation.

Monetary policy by the Federal Reserve can also cause inflation.  In fact, its caused inflation in this year.  Why?  It lowered interest rates.  Reducing interest rates can help stimulate the economy, but they also would increase money supply, meaning more money is created.  So more money is printed.  As a result the money loses its value.  So inflation is going up.  That is why inflation has hurt us this year and may continue to do so unless the FED lowers interest rates, which could slow the economy nevertheless.