Deflationary policy
To reduce the amount of aggregate demand in an economy, the government put various fiscal and monetary policy measures, which are referred to as deflationary. Such policies are adopted when there is a considerable rise in inflation, raising the need for action to diminish the rate of economic activity. Reducing economic activity can be done by lowering consumption, investment, and government spending, increasing imports, or lowering exports. Deflationary policies are used to curb rising price levels in the economy. An economy may experience demand-pull inflation or cost-push inflation. Demand-pull inflation is caused by demand-supply imbalances arising from excess aggregate demand in the economy. Cost-push inflation, also sometimes referred to as supply-side inflation, occurs due to a decline in aggregate supply in the economy and a backward or leftward shift of the supply curve due to causes like wage hikes inducing wage to push inflation, raw material hikes or any other issue that increases the cost of production for buyers. Inflation hurts economies because investments and business decisions are heavily impacted. People's financial savings decline due to inflation. The anticipation of a future price rise is also why producers or suppliers hoard goods. Finally, the most significant danger associated with inflation is the risk of it going out of control and crippling the entire economy due to hyperinflation [Kalkinemedia].
The deflationary policy is connected with a reduction of money supply in an economy and, therefore, a reduction of economic activity, which is often part of an intentional government plan to reduce prices [Cambridge Dictionary].
Deflationary Policy. Kalkinemedia. Retrieved from: https://kalkinemedia.com/definition/d/deflationary-policy
Deflationary. Cambridge Dictionary. Retrieved from: https://dictionary.cambridge.org/dictionary/english/deflationary