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③ supply-side policy-总供应相关政策
Monetary policies
refers to the use of interest rates, exchange rates and the money supply to control macroeconomic objectives and to affect the level of economic activity
Measures：interest rate, money supply and exchange rate
refers the use of taxes and government spending to affect macroeconomic objectives such as economic growth and employment
Measures：taxation and government spending
为了解决由于总需求AD上升导致的demand-pull inflation，一般需要使用能够降低AD的contractionary policy收缩性政策。
a) Contractionary monetary policy: increase interest rate, reduce money supply and increase exchange rate
b) Contractionary fiscal policy: increase tax rate and reduce government spending
refers long-term measures to increase the productive capacity of the economy, leading to an outward shift of the production possibility curve.
supply-side policy可以通过降低cost of production的方式，来增加aggregated supply，从而降低物价。主要解决cost-push inflation。
美国经济在疫情期间采取宽松政策刺激总需求后，经济有在复苏，但却因为stressed supply chain due to shutdown of china , Russian war with Ukraine, and ongoing pandemic面临着历史最高通货膨胀。
通货膨胀导致油价，食品价格，房价，交通价格等上涨，居民的生活成本大幅上升。
tighten monetary policy 也就是紧缩的货币政策。比如提高利率从而减少total demand并遏制价格上涨的压力。今年以来美国加息五次，将联邦基金利率目标区间上调到3%至3.25%之间。
在某些商品上通过price control防止价格过高，例如，美国通过白宫3月31日宣布，在未来6个月每天从战略石油储备(Strategic Petroleum Reserve)中释放100万桶，约占全球需求的1%，总释放量可达到1.8亿桶。这是白宫有史以来释放原油储备规模最大的一次。
美国还通过改善供应链来抑制通胀。减少对中国和俄罗斯的依赖，建立“Indo-Pacific economic Framework”。
2022年8月份，美国总统拜登签署《2022年通胀削减法案》，意在通过减少财政赤字、增加对大企业征税等措施来遏制通胀。
Discuss whether monetary policy alone is the best way for a government to correct inflation. [12]
①Inflation; demand-pull and cost-push.
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Contractionary and expansionary
Contractionary monetary policy
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Increase interest rate → return of saving decreases → saving decreases → consume expenditure(C) decrease → AD decreases.
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Increase interest rate → cost of borrowing increases → investment(I) decreases → AD decreases.
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Increase exchange rate → export becomes relatively more expensive and import becomes relatively cheaper → export decreases and import increases → net export (NX) decreases → AD decreases.
Part 3
discuss when the monetary policy is ineffective
The effectiveness of monetary policy to correct inflation will depends on a number of factors:
①Interest rate may not solve its problems.
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a higher interest rate also have adverse effect on unemployment and economic growth.
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a rise in the interest rate may discourage foreign investment.
②Confidence level may make consumers’ and investors’ behaviours unpredictable.
①Define supply-side policy.
②Explain how the policy measures work.
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Increasing spending on education and training→improve labour’s skills (human capital)→ productivity increases→ AS increases.
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Reducing direct tax→ such as corporation tax→ more profit to increase investment→ productivity increases→ AS increases.
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Privatisation→profit-motive→more efficient→AS increases.
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Not very effective in the short term as they can take a long time to have an effect.
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increased government spending on education and cuts in tax may increase AD before they increase AS.
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Privatisation may not result in an increase in efficiency if the privatized industries become monopolies and do not take into account external costs and benefits.
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If output and employment are low, LARS perfectly elastic, firm can attract more resources without rising price level, decreasing AD without decreasing the price level.
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So contractionary monetary policy can be ineffective.
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If economy close to full capacity, LARS vertical, contractionary monetary policy is very effective.
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Supply-side policy is effective in the long run but it is time-consuming and costly.
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