Which action is associated with reflation?

Which action is associated with reflation?

• A. Cutting interest rates
• B. Increasing money supply
• C. Cutting government spending
• D. Raising tariffs

Answer: (B)

Reflation is about lifting aggregate demand to raise output and push the price level back toward target after a downturn. A primary way to achieve this is through monetary expansion—increasing the money supply. When the central bank expands the money supply, there’s more liquidity in the banking system. That tends to lower borrowing costs, encourage lending, and stimulate spending by households and firms. The boost in spending raises aggregate demand, which can increase real GDP and inflation toward the desired level—exactly what reflation aims to accomplish. The other options don’t fit as well. Cutting government spending reduces demand, which would dampen inflation rather than fuel it. Raising tariffs can distort trade and generally weaken domestic demand. Cutting interest rates is another expansionary move, but increasing money supply is the direct mechanism that most clearly aligns with reflation by expanding the monetary base and enabling greater lending and spending.

Reflation is about lifting aggregate demand to raise output and push the price level back toward target after a downturn. A primary way to achieve this is through monetary expansion—increasing the money supply.

When the central bank expands the money supply, there’s more liquidity in the banking system. That tends to lower borrowing costs, encourage lending, and stimulate spending by households and firms. The boost in spending raises aggregate demand, which can increase real GDP and inflation toward the desired level—exactly what reflation aims to accomplish.

The other options don’t fit as well. Cutting government spending reduces demand, which would dampen inflation rather than fuel it. Raising tariffs can distort trade and generally weaken domestic demand. Cutting interest rates is another expansionary move, but increasing money supply is the direct mechanism that most clearly aligns with reflation by expanding the monetary base and enabling greater lending and spending.