Measures to control inflation, Microeconomics

Measures to control inflation:

Fiscal policy is one of the two main macroeconomic policies used to control aggregate demand and thereby achieve economic stability. Fiscal measures relate to taxation, government expenditure and public debt management, which seek to influence the level of aggregate demand in an economy. There are three main tools of fiscal policy viz government spending (G), the income tax rate (t) and government transfer payment (Tr). In times of demand pull inflation these tools are used to reduce aggregate demand. An increase in tax rate, decrease in government expenditure and decline in government expenditure and decline in government transfer payment will reduce aggregate expenditure in the economy.

Monetary policy is that part of macroeconomic policy which regulates the changes in money supply in order to maintain price stability.Tools of monetary policy are changing discount rate (d); changing required reserve ratio (rr) reduces the extent to which commercial banks create credit hence reduces money supply.When the discount rate is increased short term interest rates increase and this discourages borrowing to finance investment spending. This invariably reduces aggregate demand. Central bank selling of its own government securities to the general public reduces money supply which reduces aggregate demand.

Income Policy: These measures may take the form of wage freeze, linking wage increases to increase in productivity.

Price controls may also be used.Maximum prices are used in this case. These prices are the highest possible legal prices for scarce goods. However, these prices may lead to queues, rationing and black marketing in scarce products.

Supply Side Policies: In addition to the demand management policies, supply side policies could also be used in controlling inflation. This however is a long-term measure. The following may increase aggregate supply: increasing productivity in all sectors of the economy.Increases in productivity may increase output, which will subsequently increase supply.This may be achieved by the retraining of labour, improving technology, removing all structural rigidities e.g. land tenure system, poor road infrastructure etc.

Posted Date: 1/3/2013 12:33:24 AM | Location : United States

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