We can term this A higher interest rate should also lead to a higher exchange rate, which helps to reduce inflationary pressure by:Interest rates were increased in the late 1980s / 1990 to try and control the rise in inflation.As part of monetary policy, many countries have an inflation target (e.g. During inflation, government spending may be reduced.However, due to some political reasons or economic compulsion, cut in public spending may be difficult. For this purpose, it raises the bank rates, sells securities in the open market, raises the reserve ratio, and adopts a number of selective credit control measures, such as raising margin requirements and regulating consumer credit. Click the OK button, to accept cookies on this website. Prices as well as wages are extremely erratic. Such an approach is known as ‘package deal approach’.Welcome to EconomicsDiscussion.net! – Meaning, Types, Control Inflation The most important of these is fiscal policy measures.Fiscal policy measures comprise the policy of the government relating to taxation, expenditure and borrowing. Shortage of supply of labor, raw materials and capital drives up prices.Cost-push inflation occurs if demand for the products or services is inelastic.The increased price of the factors of production causes to a decreased supply of these goods/services. Higher cost of credit makes less availability of credit and, hence, less money supply. 4) Government should check the corruption first to eliminate the inflation. Inflation is generally controlled by the Central Bank and/or the government. Further, a cut in transfer payments like food subsidy programme to poorer persons or unemployment allowance, etc., may seem to be unwise during inflation though such expenditures are required to be curbed.Before we conclude the effectiveness of monetary policy and fiscal policy measures, we must say that even the best combination of these two policy measures may not yield desired results. To them, inflation is caused, of course, by an increase in aggregate demand (C + I + G + X – M).Basically, these two arguments for inflation lead to demand management policies. Technological improvement may also lead to higher output. No economy does own a ‘speedometer’ that can tell how fast the aggregate demand is growing—’We find out what GDP is doing during the current quarter only at the end of the quarter’. The government should reduce unnecessary expenditure on non-development activities in order to curb inflation. Price control and rationing is another measure of direct control to check inflation. It is applied to essential consumer goods such as wheat, rice, sugar, kerosene oil, etc. Wage and price controls help in controlling wages as the price increases. Therefore, reducing the growth of aggregate demand (AD) should reduce inflationary pressures.The Central bank could increase interest rates. Supply-side policies may enable the economy to become more competitive and help to moderate inflationary pressures. (ii) If there is need, raw materials for such products may be imported on preferential basis to increase the production of essential commodities, (iii) Efforts should also be made to increase productivity. Bank rate, open market operations and other instruments of credit control have no answer to cost-push inflation. It is meant to stabilise the prices of necessaries and assure distributive justice.
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measures to control inflation ppt