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 Control of money supply — Monetarists argue there is a close link between the money supply and inflation, therefore controlling money supply can control inflation.
What methods can the government use to control inflation? By Leslie Kramer Updated January 9, — When a currency is worth less, its exchange rate weakens when compared to other currencies. For example, controlling inflation through wage and price controls can cause a recession and cause job losses.
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. Reducing spending is important during inflation, because it helps halt economic growth and, in turn, the rate of inflation.
So, when the Federal Reserve increases its interest rate, banks have no choice but to increase their rates as well. So, spending drops, prices drop and inflation slows.
Reserve Requirments The second tool is to increase reserve requirements on the amount of money banks are legally required to keep on hand to cover withdrawals.
The more money banks are required to hold back, the less they have to lend to consumers. If they have less to lend, consumers will borrow less, which will decrease spending.
Reducing the Money Supply The third method is to directly or indirectly reduce the money supply by enacting policies that encourage reduction of the money supply. Two examples of this include calling in debts that are owed to the government and increasing the interest paid on bonds so that more investors will buy them.
The latter policy raises the exchange rate of the currency due to higher demand and, in turn, increases imports and decreases exports.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.
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. 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.
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.
INFLATION The government control measures, all over the world, keep business cycles under control. What has gone nearly uncontrolled over the time is the problem of almost continuous increase in the general price level (this is the problem of inflation).
Inflation can, therefore, be controlled by increasing the supplies of goods and services and reducing money incomes in order to control aggregate demand.
ADVERTISEMENTS: The various methods are usually grouped under three heads: monetary measures, fiscal measures and other measures.