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Overview

Policymakers attempt to solve deflation by making use of fiscal policy and monetary policy.

Deflation is a general decline in prices for goods and services and can be a serious economic problem.

Expansionary fiscal policy can help to solve the problem of deflation as it puts more money into consumers' and producers' hands to give them more purchasing power. It is designed to increase aggregate demand. This can be achieved in two ways.

Government spending can be increased.
The government can cut tax rates.

Expansionary monetary policy is intended to increase aggregate demand by

a cut in the interest rate
an increase in the money supply
a reduction in the foreign exchange rate.

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