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







Related Discussions:- Measures to control inflation, Assignment Help, Ask Question on Measures to control inflation, Get Answer, Expert's Help, Measures to control inflation Discussions

Write discussion on Measures to control inflation
Your posts are moderated
Related Questions
Mercantilism:It is an economic theory from pre-capitalist times which held that a country's prosperity depended on its ability to produce large and persistent surpluses in its fore

Who are the competitors in the jarred baby food market? What market share do they have? How do Heinz and Beech-Nut compete with one another? Are the barriers to entry high or low f

Time is a significant determinant of price elasticity.  If a price changes, it might take consumers a certain amount of time to discover alternative lifestyles or commodities to ac

chemistry assignments ,  Some normally nonmagnetic substances are attracted by a magnetic field and studies of these "paramagnetic" substances give information about the number of

Warehousing Facilities: These should be expanded in important commercial centres abroad, specially for fast-moving consumer goods. Nowadays, foreign buyers are reluctant to keep


Various studies have concluded that the demand for movie cinema attendance is responsive to advertising.  A study of one company, with movie cinemas in three neighbouring towns, sh


Value Added:Value added in a particular stage of production equals value of total output, less the value of intermediate products (comprising raw materials, capital equipment and o

explain the main criteria for classifying firms into industries.which criteria serve the better and why?