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On the other hand, if the Government intervenes in the economy to reduce inflationary pressures, it will raise the rates of personal taxes to reduce disposable income of the people.Rise in personal taxes will lead to the decrease in aggregate demand.But while inequality is a problem, raising interest rates is no way to address it.

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This is because with the rightward shift in IS curve rate of interest also rises which causes reduction in private investment. 20.6 that, with the LM curve remaining unchanged, the new IS.

Decrease in aggregate demand will help in controlling inflation. Through making appropriate changes in monetary policy the Government can influence the level of economic activity.

Monetary policy may also be expansionary or contractionary depending on the prevailing economic situation.

Increase in investment demand through multiplier process leads to a greater increase in aggregate demand and national income.

If the economy suffers from inflation, the Government will like to check it.

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