Remedies Of Inflation

Wednesday 16th of March 2011 | By: Administrator | Views: 7652 | Comments: 0 | Rating: 3 Star Content3 Star Content3 Star Content3 Star Content3 Star Content |  


The first panacea for a mismanagement nation is inflation of the currency. The second is war. Both bring a permanent ruin. They both are the refuge of political and economic opportunists. (Ernest Hemigway). To avoid political unrest and harmful, social and economic effects on the economy, it is the main objective of every government to take appropriate measures to control inflation. The main measures which are used to control inflation are (1) Monetary Policy (2) Fiscal Policy and other measures:

(1) Monetary Policy
Monetary policy is a policy that influences, the economy through changes In the ‘money supply and available credit Monetary policy is adopted by central bank of a country. The various monetary measures which are used to control inflation are grouped under two heads (a) Quantitative controls (b) Qualitative controls. They are (1) Open market operations (ii) Variation in bank rates (iii) Credit rationing (iv) Varying reserve requirements (v) Varying margin requirements (vi) Consumer credit regulations (Please refer to Chapter on Central Banking).

(2) Fiscal Policy
Fiscal policy is the deliberate change in either government spending or taxes to stimulate or slow down the economy. It is the budgetary policy of the government relating to taxes public expenditure, public borrowing and deficit financing. Fiscal policy is based upon demand management i.e., raising or lowering the level of aggregate demand by controlling various expenditures, government expenditure, consumption expenditure and investment expenditure. The main fiscal measures are:

(i) Changes in Taxation. If the govt., of a country brings about changes in tax rates, it can help in stabilization of prices in the country. For example, a decrease in taxes rates, increases disposable income in relation to national income. Hence, consumption rises at every level of national income. With the increase in aggregate demand for goods, the employment goes up in the country. A rise in tax rates has the opposite effect. A rise in taxes causes a decrease in disposable income, creates a larger budget deficit and brings relief from inflation.

(ii) Changes in Govt. Expenditure. If inflation is at or above the level of full employment in the country, the government can bring down price level by curtailing its own unproductive expenditure.

(iii) Public borrowing. Public borrowing is another effective method of controlling inflation. Public borrowing reduces the aggregate demand for goods and hence price level.

(iv) Balanced budget changes. A balanced budget decrease has a mild contractionary effect on national income and hence on bringing down the price level.

(v) Control of deficit financing. For financing the budget deficit, the govt., often resorts to deficit financing. The bank borrowing and printing of new notes increases the money supply in the country and pushes up the price level. Deficit financing therefore, should be avoided to control inflation.

(3) Others Measures:
Apart from fiscal and monetary measures, the other measures which are helpful in controlling inflation are:
(a) Price support programme
(b) Provision of subsidies
(c) Arrangements of easy availability of goods on hire purchase to stimulate demand.
(d) Imposing direct control on prices of essential items.
(e) Rationing of essential consumer goods in case of acute emergency holding of Friday and Sunday markets.

Since 1950’s, the control of inflation has become the chief objective of both developing and developed countries of the world. The governments, therefore, take monetary, fiscal and other measures to combat inflation.

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