Question on: JAMB Economics - 2002

Excess demand inflation occurs when aggregate demand exceeds aggregate supply, leading to rising prices. Contractionary policies aim to reduce aggregate demand, thereby curbing inflation.

• Contractionary fiscal policy involves measures like increased taxes or reduced government spending. These actions decrease the disposable income of households and reduce overall demand in the economy.
• Contractionary trade policy involves measures like tariffs and quotas, aimed at reducing imports and potentially demand, but it is not a primary or effective tool for controlling excess demand inflation.
• Expansionary fiscal policy (increased government spending or reduced taxes) and expansionary monetary policy (e.g., lowering interest rates, increasing the money supply) would stimulate demand, worsening the inflationary pressure.