Surplus budget Methods to control inflation Contd. Monetary policy alone is incapable of controlling inflation. This helps reduce spending because when there is less money to go around, those who have money want to keep it and save it, instead of spending it.
Monetary Policy In a period of rapid economic growth, demand in the economy could be growing faster than its capacity can grow to meet it.
This should lead to lower growth in consumer spending and investment. The other types of measures are those which aim at increasing aggregate supply and reducing aggregate demand directly.
So, spending drops, prices drop and inflation slows. Thirdly, price control cum rationing of essential commodities may also be recommended as short run measures.
From the various monetary, fiscal and other measures discussed above, it becomes clear that to control inflation, the government should adopt all measures simultaneously. In its recommendation for India IMF has suggested that fiscal deficit in India should be reduced to 3 per cent of GDP if inflationary pressures are to be controlled.
Those, especially banks, who buy these securities, will make payment for them in terms of cash reserves. Surplus budget Methods to control inflation Contd. Lower wage growth helps to reduce cost-push inflation and helps to moderate demand-pull inflation. Inflation is like a hydra- headed monster which should be fought by using all the weapons at the command of the government.
Supply-side policies — policies to increase competitiveness and efficiency of the economy, Methods to control inflation downward pressure on long-term costs.
Rationing aims at distributing consumption of scarce goods so as to make them available to a large number of consumers. Whereas the general credit controls seek to regulate the total available quantity of credit through changes in the high powered money and the cost of credit, the selective credit control seeks to change the distribution or allocation of credit between its various uses.
Price control and rationing is another measure of direct control to check inflation. Not only has the bank rate had to be raised but also the deposit and lending rates of commercial banks if full effect of the monetary measures is to be achieved. The methods of credit control described above are known as quantitative or general methods as they are meant to control the availability of credit in general.
Another important measure is to adopt a rational wage and income policy. Supply Management through Imports: All these measures make bank credit more costly. Monetary policy — Setting interest rates. However, this instrument is effective mainly in controlling consumption spending. Supply Side Policies Often inflation is caused by persistent uncompetitiveness and rising costs.
They could still reduce inflation, but, it would be much more damaging to the economy. It has been asserted by some economists who are pro-private sector that higher interest rate discourages private investment and therefore lowers rate of economic growth.
The following measures should be adopted to increase production: Chaos and frenzy created in the common people initially. For this purpose, industrial peace should be maintained through agreements with trade unions, binding them not to resort to strikes for some time, iv The policy of rationalisation of industries should be adopted as a long-term measure.
Reducing Fiscal Deficit 2. Therefore, to check inflation the Government should try to reduce fiscal deficit.
This improves the budget situation and helps to reduce demand in the economy.
For example in the Indian Government removed customs duties on imports of wheat and rice and reduced them on oilseeds, steel etc. Instead, the government should borrow more to reduce money supply with the public.In fact, inflation in an economy is a mixture of demand-pull and cost-push factors.
Thus, for controlling inflation, policymakers employ three methods: (i) monetary measures; (ii) fiscal measures; and (iii) non-monetary measures. Therefore, at the time of inflation, the government reduces its expenditure and increases taxes for dropping private spending.
3. Price Control: Another method for ceasing inflation is preventing any further rise in the prices of goods and services. In this method, inflation is suppressed by price control, but cannot be controlled for the long term. Methods to Control Inflation Essay Sample. METHODS TO CONTROL INFLATION Inflation in general terms means expansion.
In the context of prices inflation means continuous rise in price level. Some of these methods work well while others can cause damaging There are many methods used by the government to control inflation; one popular method is through a contractionary monetary policy.
The methods of credit control described above are known as quantitative or general methods as they are meant to control the availability of credit in general.
Thus, bank rate policy, open market operations and variation in cash reserves ratio expand or contract the availability of credit for all purposes. Methods to Control Inflation- Monetary Methods.
Credit bigskyquartet.comtization of currency e Issue of new currency of a smaller denomination of higher value; e.g. a new i .Download