Explanation:
Fiscal consolidation involves reducing government deficits and debt accumulation, typically through decreased public spending or increased taxation. This approach can support disinflation in several ways:
B is incorrect: Expansionary fiscal policy increases aggregate demand, counteracting monetary tightening and potentially exacerbating inflation.
C is incorrect: Fiscal and monetary policies are interconnected; fiscal actions can significantly influence inflation and the effectiveness of monetary policy.
D is incorrect: Monetary policy primarily targets price stability, while fiscal policy addresses government spending and taxation; direct targeting of specific price levels is typically within the purview of monetary authorities.
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Q.6369 The BIS Annual Economic Report 2024 highlights the importance of coordinating monetary policy with other policy measures. Which of the following correctly describes the relationship between fiscal policy and monetary policy in the context of disinflation?
A
Fiscal consolidation supports disinflation by reducing aggregate demand and enhancing the credibility of monetary policy.
B
Expansionary fiscal policy complements monetary tightening by further reducing aggregate demand.
C
Fiscal policy has no significant interaction with monetary policy in influencing inflation.
D
Fiscal policy should directly target specific price levels, while monetary policy should focus on broader macroeconomic stability.