Government strategies to control inflation

Custom Search Why and how does government attempt to control inflation? Monetarism Monetarism seeks to control inflation through controlling the money supply.

Board of Governors of the Federal Reserve System

This will have a dual effect. The bank rate is the rate at which the commercial bank gets a rediscount on loans and advances by the central bank. It is a very effective measure. Such inflation is termed as suppressed inflation. However, in present scenario, reducing government expenditure is not possible because there may be certain on-going projects for social welfare that cannot be postponed.

According to this policy, if more output is produced at a low per unit cost, there are chances for the economy to attain persistent economic growth and development, without being affected by inflation.

It has bad effect on growth especially argued by monetaristbecause it increases uncertainty and discourages savings. Further, to bring more revenue into the tax-net, the government should penalise the tax evaders by imposing heavy fines.

Then in turn, as the goods are expensive, labour demands wage increases that will increase the production costs even further.

As a result, the total spending of individuals decreases, which, in turn, reduces money supply in the market.

Measures for Controlling Inflation (With Diagram)

This makes the borrowing of money expensive for general public. Reducing spending is important during inflation, because it helps halt economic growth and, in turn, the rate of inflation.

The principal fiscal measures are the following: They could still reduce inflation, but, it would be much more damaging to the economy.

Monetary policy — Setting interest rates. Monetary Policies have a great role to play in 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.

This category includes quantitative easingthe purchase of varying financial assets from commercial banks. Lowering the expenses on governmental level A fall in the borrowing amounts in the government sectors, on an annual basis High direct taxes, for reducing the disposable income Monetary Policies: In such a case, reducing private spending is more preferable rather than decreasing government expenditure.

If they have less to lend, consumers will borrow less, which will decrease spending. There are great controversies regarding the consequences of inflation to the employment.

Methods to Control Inflation

As a result, commercial bank would reduce credit supply for the general public. Increase in the real rates of interest decreases the demand for loans, thereby limiting the growth of broad money.

Direct intervention policies in the UK have not been used lately. An escalation in the exchange rate is possible by increasing the rates of interest or buying money through the central bank interferences in the foreign exchange markets.

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.

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. But it is difficult to administer price control. The historical evidences have shown that price control alone cannot control inflation, but only reduces the extent of inflation.

For example, at the time of wars, the government of different countries imposed price controls to prevent any further rise in the prices. The government should reduce unnecessary expenditure on non-development activities in order to curb inflation.

Labour and Conservative governments promised not to use it before the election, but then were faced with rising inflation and finally had to. This is called so, because the economy cannot produce anymore, so the excess expenditure capacity is eliminated by raising the prices.

Inflation is considered to be a complex situation for an economy. The central bank of the country adopts a number of methods to control the quantity and quality of credit.Inflation is generally controlled by the Central Bank and/or the government.

The main policy tools to control inflation include: Monetary policy – Setting interest rates. Higher interest rates reduce demand, leading to lower economic growth and lower inflation 17 thoughts on “ Methods to Control Inflation. The historical evidences have shown that price control alone cannot control inflation, but only reduces the extent of inflation.

For example, at the time of wars, the government of different countries imposed price controls to prevent any further rise in the prices. Strategies for Controlling Inflation 9 policy-makers wanted to have lower unemployment, they could ‘buy’ it by accepting a higher rate of inflation.

Why and how does government attempt to control inflation? For hundreds of years before the 20th century the value of the pound had remained almost the same. There are many methods used by the government to control inflation; one popular method is through a contractionary monetary policy.

content for financial advisors around investment strategies. here are some of the measures that are taken by banks as well as goverment to control inflation.

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Government strategies to control inflation
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