MONETARY AND FISCAL POLICY.

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The relationship between monetary policy and future prices affects wages, thus producing a real impact or higher production in the short term. This is because agents set their real wages based on past prices, information that may be insufficient to correctly estimate real wages.

A poor specification of the real wage, for example downward, produces productive increases and demand for employment. Excessive specification generates unemployment and reduces production.

- Inflation is the sustained and generalized increase in the goods and services of an economy over time.

- Fiscal deficit: when the public sector spends more money than it receives it is said to be in deficit. This deficit can be financed with loans from the central bank, thus increasing the monetary base. This causes more money in the economy and increases the price level; Therefore, inflation increases.

- Inconsistent policies: Even when policies to maintain the level of prices are apparently correct, there is a possibility that some prices may be they generate some inertia over inflation. Thus, the indexation of some determinant of inflation to past inflation could lead to its perpetuation. An example of this could occur if wages are indexed to last year's inflation and inflation is high. This would generate an inflationary spiral.

- Contraction of aggregate supply: when there is a decrease in aggregate supply due to the increase in costs associated with production processes (for example, an increase in the price of oil), companies increase their prices to maintain their profit margins.

- Increased aggregate demand: aggregate demand is the volume of goods and services required by an economy. An increase in the aggregate demand greater than the goods and services that the economy can produce, causes an increase in the prices, since there is much money chasing to few goods.

- Interest rate: an important tool that the central bank has to control the growth of money and therefore inflation, is the interest rate. The mechanism works as follows: a higher interest rate reduces aggregate demand by discouraging investment and consumption, increasing people's savings; In this way the amount of money available in the economy is limited, so the price level decreases. The opposite happens when the interest rate decreases; Now people are encouraged to invest and consume, since having money in banks is not the best option, so the amount of money available banks is not the best option, so the amount of money available in The economy is increased, which causes the price level to increase.

When the price system works properly, the signals which it issues constitute valuable information for decision-making.

• On the one hand, it facilitates long-term planning by agents

Economic: Households are encouraged to save on seeing that the real value of their money is not decreasing. Companies can allocate resources to best allocate resources with respect to production, employment and capital accumulation.

• On the other hand, the risk in the financial markets decreases: interest rates are reduced, which promotes greater investment. It promotes the development of new medium and long instruments term. This has contributed to the modernization and deepening of the financial sector in Mexico.