The Economist on the 7th May 2011 printed the following:
"But Vietnam's government seems newly determined to douse the inflationary fires. On May 4th the country's central bank, the State Bank of Vietnam, raised one of its key rates to 14%, the latest in a flurry of increases since February. Its campaign was accompanied by a package of commitments to tighten money and credit ... .
The article touches upon two crucial instruments of monetary policy. What are they? How do the instruments of contractionary monetary policy work in principle? Explain your answer with the help of diagrams (AD-AS or Keynesian Cross and MD-MS).
What are the costs of disinflation? Explain your answer based on a diagram (AD-AS).