If a country has 15 inflation it will need to use disinflati

If a country has 15% inflation, it will need to use disinflating policy to reduce it and this would likely be done with monetary policy. Disinflation is a painful process because of what it does to an economy. Explain.

Solution

Disinflation through monetary policy will require the Central bank to reduce money supply via increasing the reserve requirement, discount rate or conducting open market sales of government securities. This is painfull for two reasons. Firstly it would increase interest rates, making it difficult and costly to borrow funds. Secondly real GDP reduces because investment and consumption spending are reduced. Because price level is reduced there is little incentive to produce and this can put the economy into a vicious circle of disinflation and reduced production. Unemployment is increased because firms are not producing and so they start laying of workers. There are no jobs, little production and hence,  disinflation is considered painful