Measures to control inflation economics essay

Therefore, the proposal has been to freeze wages in the short run and wages should be linked with the changes in the level of productivity over a long period of time.

When inflation is of the type of supply-side inflation, imports are increased to augment the domestic supplies of goods. As mentioned above, the higher rate of interest on saving and fixed deposits will induce more savings by the households and help in cutting down aggregate consumption expenditure.

The rural poor are left to the mercy of the dishonest traders. Thus, both by greater resource mobilisation on the one hand and pruning down of wasteful and inessential Government expenditure on the other, the fiscal deficit and consequently inflation can be checked.

How to Control Inflation (4 Measures)? – Explained!

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.

In case of smuggling, large quantities of essential items such as sugar, ghee, wheat, rice etc are exported to the foreign countries illegally in order to get higher prices. For example, more flexible labour markets may help reduce inflationary pressure.

Price control means fixing an upper limit for the prices of essential consumer goods. This is only a technical way of creating new money because the Government has to pay neither the rate of interest nor the original amount when it borrows from Reserve Bank of India against its own securities.

What methods can the government use to control inflation?

This will tend to reduce the supply of credit or loanable funds which in turn would tend to reduce investment demand by the business firms.

See more on higher interest rates A higher interest rate should also lead to higher exchange rate, which helps to reduce inflationary pressure by Making imports cheaper.

Therefore all necessary steps should be taken to provide chief energy sources to the industrial and agricultural sectors of economy.

Measures for Controlling Inflation (With Diagram)

It should, therefore, be supplemented by fiscal measures. Therefore, the best course is to link increase in wages to increase in productivity. Involves increase or decrease in reserve ratios by the central bank to reduce the credit creation capacity of commercial banks.

It is applied to essential consumer goods such as wheat, rice, sugar, kerosene oil, etc. The measures for controlling inflation are discussed below in points: Under this system, one new note is exchanged for a number of notes of the old currency.

It should also introduce compulsory provident fund, provident fund-cum-pension schemes, etc. Measures to control Inflation: The measures for controlling inflation are discussed below in points: Increase in interest rate is an important measure to control Inflation.

To check the rise in price the Government should not only build up an adequate stock of food grains but also maintain a public distribution system throughout the country. Inflation occurs when an economy grows due to increased spending. When this happens, prices rise and the currency within the economy is worth less than it was before; the currency essentially won.

There are many methods used by the government to control inflation; one popular method is through a contractionary monetary policy. Some of these methods work well while others can cause damaging.

Apart from monetary policy, the government also uses fiscal measures to control inflation. The two main components of fiscal policy are government revenue and government expenditure. In fiscal policy, the government controls inflation either by reducing private spending or by decreasing government expenditure, or by using both.

Paragraph on Inflation: Introduction, Causes and Control Measures. Measures to control Inflation: The measures for controlling inflation are discussed below in points: How can government control inflation?

Essay on Inflation in India: Problems and Government Initiatives. Through rate of inflation economists measures the cost of living in an economy. Let us explain how rate of inflation is measured.

Suppose P i X represents the price level on 31st March and P represents the price level on 31st March

Methods to Control Inflation Measures to control inflation economics essay
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What methods can the government use to control inflation? | Investopedia