Final answer:
The correct answer is (D) A tight fiscal policy will decrease inflation as it reduces aggregate demand. However, this effect might be moderated or even counteracted by an easy monetary policy meant to increase aggregate demand.
Step-by-step explanation:
When considering a scenario with stable inflation and the government employing a tight fiscal policy while the central bank enacts an easy monetary policy, the effects on inflation can be complex. A tight fiscal policy, consisting of reduced government spending or increased taxes, generally aims to reduce the budget deficit and can lower aggregate demand. This could potentially lead to less pressure on prices and thus might decrease inflation. However, when paired with an easy monetary policy, which might involve lowering interest rates or increasing the money supply, the central bank is working to increase aggregate demand, possibly to counteract the contractionary effects of fiscal policy or to address other economic concerns like unemployment. It is the interaction between these two policies that will ultimately determine the effect on inflation.
Given that the tight fiscal policy could decrease inflation by reducing aggregate demand, the correct answer to the student's question is (D) A tight fiscal policy will decrease inflation. However, it's critical to note that the easy monetary policy can have an inflationary effect by increasing aggregate demand. Thus, the net effect on inflation depends on which policy is more dominant in influencing economic activity.