total revenue is maximized. Which of the following policy actions could the Central Bank use to combat inflation? none of the options is correct Cutting the reserve requirement to reduce the amount of excess reserves held by banks Raising taxes to reduce the interest rate O Cutting the discount rate to decrease the availability of loans to banks O Selling government bonds to reduce the money supply
IS-LM-PC Analysis
The IS (Investment Saving), LM (Liquidity Preference- Money Supply), and PC (Philips Curve) is the model that looks at the dynamics of output and inflation. It takes into account the central bank policy decision to adjust the inflation and real interest rate in the economy. It enables the economist to weather to priorities between employment and inflation rate analyzing the model. It is a practice-driven approach adopted by economists worldwide.
IS-LM Analysis
The term IS stands for Investment, Savings, and LM stands for Liquidity Preference, Money Supply. Therefore, the term IS-LM model is known as Investment Savings – Liquidity preference money Supply. This model was introduced by a Keynesian macroeconomic theory which shows the relationship between the economic goods market and loanable funds market or money market. In other words, it shows how the market for real goods interacts with the financial markets to strike a balance between the interest rate and total output in the macroeconomy. This particular model is designed in the form of a graphical representation of the Keynesian economic theory principle. The output and money are the two important factors in an economy.
Central Banks use monetary policy to adjust the inflationary pressure in the economy. Central Banks solve the economic fluctuations by adjusting bank rates, reserve ratios and open market operations.
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