Appropriate government policy involves the government when there is severe demand-pull inflation in the economy. Retained earnings and sales of securities on the open market, higher discount rates, and higher reserve requirements.
Demand-pull inflation is a type of inflation caused when consumer demand for goods and services increases. This drives prices up as businesses try to meet increased demand due to a shortage of the necessary supply. This has historically been the most common cause of inflation.
For example, if the cost of producing tires suddenly doubled, the price of those tires would also rise, causing inflation. This could also affect the car market as automakers have to pay more to complete their vehicles.
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