since inflation has negative effect in the economy the government should control it. but control of inflation does not mean that the price is kept constant totally. excessive inflation will have serious social, political economic effects. therefore, for the equilibrium of the economy, the inflation has to be controlled. to control the rate of inflation the following measures can be undertaken:
1.monetary measures
2.fiscal measures
3.direct measures
1. monetary measures
the inflation in the economy can be controlled by the monetary policy of the central bank. for the control of inflation, the central bank will undertake the following monetary measures:
(1) increase in bank rate
to control the inflation the central bank will increase the bank rate. this will increase the intertest rate for the loan provided by the bank. thus, increased interest the will decrease the demand for loans. decreasing the monetary expansion. this will control inflation to some extent.
(2) open market operation
for the control of inflation the central bank sells the government securities to the businessmen and public through open market operation. this will bring the money from the hands of businessmen and public to the hands of central bank. the quantity of money in the hands of businessmen and public will decrease and as a result inflaton will be controlled.
(3) increase in the minimum cash reserve ratio
central bank will increase the minimum cash reserve ratio of the commercial banks. so, commercial banks will have to deposit more amount of cash in the centeal bank. this will decrease the credit creation capacity of the commercial banks and as a result inflation will be controlled.
(4) decrease in the credit facility
if credit facilities and instalment facilities are given for the durable goods, such as televisions, cars, washing machines, refrigerators, etc. then demand for such goods will increase. to control inflation in such a situation, the central bank will increase the amount of first instalment. this will decrease the demand for such goods and as a result inflation will be controlled.
(5) changes in the margin requirement of securities
when inflation occurs in a country, then to control this the central bank will arrange a system for commercial banks to provide less amount of loan than the value to the securities. as a result of this , customers will get less amount of loan for the higher value of securities. this will decrease in the monetary-expansion and inflation will be controlled.
2. fiscal measures
to control the inflation that occurs in the economy, the government has to undertake fiscal measures along with the monetary measures. government can control inflation through different types of fiscal policies which can be explained as follows:
(1) increase in the rate of taxation
government has to increase the tax rate in various sectors of the economy. this will decrease the quantity of money in the hands of people of different sectors and as a result inflation will be controlled. in addition to this due to new taxes demand for goods will decrease and price increase will be checked.
(2) balanced budget
to control inflation, the government has to prepare balanced budget as far as possible. this is because to fulfill deficit budget the issuing of new notes will be required. as the issuing of new notes creares inflation it is conreolled by preparing balanced budget.
(3) decrease in the government expenditure
increase in the public expenditure by the government will increae the quantity of money in the hands of the public. this will increase in the demand for goods creating the state of inflation. so, there should be decrease in the government expenditure. this will decrease the demand and inflation will be controlled.
(4)encouragement to saving
government has to encourage saving and decrease consumption through different fiscal policies. this will decrease the demand and inflation will be controlled.
(5) over valuation of money
in the time of inflation demand for goods will increase excessively. to control this , the export of domestic goods to foreign countries should be checked. for this , the domestic currency should be over-valued. this will make the domestic goods expensive in the foreign markets. this will decrease the demand for domestic goods by customers of the foreign markets. that is, export from the domestic country to the foreign countries will decrease. as a result, domestic goods will be available in the domestic market at lower price and this will help in controlling inflation.
3.direct measures
to control inflation, in addition to monetary and fiscal policies the government can under table some other types of direct measures. with inflation by determining an appropriate wage rate. the wage of the labors should be determined on the basis of their productivity. this will also control inflation.
(1) control of the wage rate
due to high wage rate demand increase in the economy and as a result inflation will occur. in such a situation, the government can control inflating by determining an appropriate wage rate. the wage of the lab ours should be determined on the basis of their productivity, this will also control inflation.
(2) increase in production
if production increase in the same proportion as the increase in the quantity of money, then inflation won't occur in the economy. while increasing production, the government should encourage the production of necessity goods rather than the production if luxury goods. this will increase the production of necessary goods as per demand and the inflation will be controlled.
(3) change in investment pattern
during the time of inflation, income increase due to increase in the quantity of investment. but production of directly necessary goods won't increase. as a result of this, inflation will occur. in such a situation, the government should encourage investment in the production if direct consumption goods rather than in the construction of infrastructures of production.
(4) direct control
the government can control inflation by the direct control over the increase in price. in such a situation, the goods whose demand is more than the production, the government should supply those goods under "rationing". this will control the increase in demand for such goods and inflation will be controlled.
2. fiscal measures
to control the inflation that occurs in the economy, the government has to undertake fiscal measures along with the monetary measures. government can control inflation through different types of fiscal policies which can be explained as follows:
(1) increase in the rate of taxation
government has to increase the tax rate in various sectors of the economy. this will decrease the quantity of money in the hands of people of different sectors and as a result inflation will be controlled. in addition to this due to new taxes demand for goods will decrease and price increase will be checked.
(2) balanced budget
to control inflation, the government has to prepare balanced budget as far as possible. this is because to fulfill deficit budget the issuing of new notes will be required. as the issuing of new notes creares inflation it is conreolled by preparing balanced budget.
(3) decrease in the government expenditure
increase in the public expenditure by the government will increae the quantity of money in the hands of the public. this will increase in the demand for goods creating the state of inflation. so, there should be decrease in the government expenditure. this will decrease the demand and inflation will be controlled.
(4)encouragement to saving
government has to encourage saving and decrease consumption through different fiscal policies. this will decrease the demand and inflation will be controlled.
(5) over valuation of money
in the time of inflation demand for goods will increase excessively. to control this , the export of domestic goods to foreign countries should be checked. for this , the domestic currency should be over-valued. this will make the domestic goods expensive in the foreign markets. this will decrease the demand for domestic goods by customers of the foreign markets. that is, export from the domestic country to the foreign countries will decrease. as a result, domestic goods will be available in the domestic market at lower price and this will help in controlling inflation.
3.direct measures
to control inflation, in addition to monetary and fiscal policies the government can under table some other types of direct measures. with inflation by determining an appropriate wage rate. the wage of the labors should be determined on the basis of their productivity. this will also control inflation.
(1) control of the wage rate
due to high wage rate demand increase in the economy and as a result inflation will occur. in such a situation, the government can control inflating by determining an appropriate wage rate. the wage of the lab ours should be determined on the basis of their productivity, this will also control inflation.
(2) increase in production
if production increase in the same proportion as the increase in the quantity of money, then inflation won't occur in the economy. while increasing production, the government should encourage the production of necessity goods rather than the production if luxury goods. this will increase the production of necessary goods as per demand and the inflation will be controlled.
(3) change in investment pattern
during the time of inflation, income increase due to increase in the quantity of investment. but production of directly necessary goods won't increase. as a result of this, inflation will occur. in such a situation, the government should encourage investment in the production if direct consumption goods rather than in the construction of infrastructures of production.
(4) direct control
the government can control inflation by the direct control over the increase in price. in such a situation, the goods whose demand is more than the production, the government should supply those goods under "rationing". this will control the increase in demand for such goods and inflation will be controlled.
what about govt subsidies....
ReplyDeleteConcept of economics plz
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