When a government cuts down her expenditure to reduce inflation, she has embarked on___________

Step 1: Analyze the question The government is cutting its expenditure in order to reduce inflation. We need the name of this type of policy.

Step 2: Explain the concept

• Fiscal policy is the government's use of spending and taxation to influence the economy. • Expansionary fiscal policy: raising spending and/or cutting taxes. It is used to fight unemployment and recession. • Restrictive (contractionary) fiscal policy: cutting spending and/or raising taxes. It is used to fight inflation.
• Monetary policy is controlled by the Central Bank (CBN in Nigeria). It uses interest rates, the cash reserve ratio, open market operations and similar tools to manage money supply. It is not about government spending.

Step 3: Solve by checking each option

• A. Restrictive fiscal policy. Cutting government spending reduces total demand in the economy, so it eases the pressure on prices. This matches the question.
• B. Expansionary monetary policy. This increases money supply, which would worsen inflation. It also has nothing to do with government spending.
• C. Physical policy. There is no such economic policy. It looks like a distractor for "fiscal".
• D. Implementing budget deficit. A deficit means spending more than you earn, which is the opposite of cutting expenditure and would add to inflation.

Step 4: Answer Cutting government expenditure to bring down inflation is a restrictive (contractionary) fiscal policy, which is option A.

Exam tip: Match the policy tool to the institution.

• Fiscal = Government (spending and taxes)
• Monetary = Central Bank (money supply and interest rates)

Also remember that inflation calls for a restrictive policy, while unemployment or recession calls for an expansionary one.