Which policy is typically used to combat high inflation?

The chosen answer, contractionary monetary policy, is the correct approach to combat high inflation because it focuses on reducing the money supply in the economy, which can help lower inflation rates. By decreasing the amount of money available, this policy aims to increase interest rates, making borrowing more expensive and saving more attractive. As a result, consumer spending and business investments tend to decrease, which can help slow down the economy and bring inflation under control.

In contrast, expansionary fiscal policy, which involves increasing government spending or cutting taxes, is designed to stimulate the economy and typically leads to higher inflation rather than controlling it. Similarly, an increase in government spending directly injects more money into the economy, which can exacerbate inflation by driving up demand without a corresponding increase in supply. Lastly, a reduction in tax rates also serves to increase disposable income and consumer spending, further pushing demand and potentially heightening inflationary pressures rather than alleviating them. Thus, contractionary monetary policy is indeed the most effective tool for managing high inflation.