Answer to Question #44931 in Macroeconomics for Bernadine Angala
To quantify the effectiveness of the fight against inflation, a so-called loss ratio is used. It shows how many percent of the real annual output is necessary to sacrifice in order to reduce inflation by one percentage point. Proponents of the theory of rational expectations believe that the losses from fighting inflation can be significantly reduced if the plan of such anti-inflationary policy will be announced in advance, before the economic agents form their expectations, and that the most essential if people are to believe in the implementation of this plan.
Anti-inflationary policy can be carried out as a means of "shock therapy" (when the rigid monetary policy helps to quickly bring down inflation, but accompanied by a significant decline in production), and gradually, through repeated, but each time a small reduction in the rate of growth of the money supply, thus avoiding a deep recession, but does not provide with the ability to quickly bring down inflation.
More broadly, the "shock therapy" implies, as a rule, the use of a purely monetarist anti-inflation measures: extensive liberalization of economic life, freeing prices, curtailment of economic activity of the state, a hard limit of monetary growth, balancing the budget, mainly due to the reduction of social programs, and so on. Programs of gradual reduction of inflation foresee an active regulatory influence of the state (in order to mitigate the negative effects of anti-inflation measures): support of the most important industries, business tax incentives, partial regulation of the pricing process, the creation of market infrastructure, etc. In this case, the anti-inflationary reduction in aggregate demand is complemented by measures that support the proposal and creating the conditions for its growth in the future, to avoid a deep recession and unemployment (the policy of gradualism).
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