To control inflation, the monetary authorities of a country can

Step 1: Analyze the question The question asks what monetary authorities (e.g., the Central Bank of Nigeria) can do to control inflation. Inflation means a persistent rise in the general price level, usually because too much money is chasing too few goods.

Step 2: The underlying concept Monetary policy is how the central bank controls the money supply and credit in the economy.

• Expansionary (expansive) monetary policy increases money supply and credit. It is used to fight recession and unemployment, but it can worsen inflation.
• Restrictive (contractionary) monetary policy reduces money supply and credit. It is used to fight inflation.

Tools of restrictive monetary policy:

• Raising the Monetary Policy Rate (MPR)
• Raising the Cash Reserve Ratio (CRR)
• Selling government securities (open market operations)
• Issuing directives that limit bank lending

Step 3: Evaluate each option

• A. Reduce taxes: This is a fiscal policy tool, not monetary. It also leaves people with more disposable income, which raises demand and fuels inflation.
• B. Increase government expenditure: This is also fiscal policy. It raises aggregate demand and worsens inflation.
• C. Expansive monetary policies: These increase money supply and push prices up, which is the opposite of what is needed.
• D. Restrictive monetary policies: These reduce money in circulation and lower demand-pull pressure on prices. This is correct.

Step 4: Answer

Exam tip: Remember "Inflation, Squeeze; Recession, Release." To fight inflation, squeeze money (restrictive/contractionary). To fight recession, release money (expansionary). Also note that the question says monetary authorities, so taxes and government spending (fiscal policy) can be eliminated immediately.