What is Inflation? Measures to control Inflation


We will talk about What is Inflation?


Inflation is the rise in the general price level which causes a decline in the purchasing power of money. But each and every rise in the general price level cannot be termed as inflation in the true sense. According to Keynes, in the true sense, inflation starts only after the state of full employment. According to monetarists, inflation is a purely monetary phenomenon, i.e it occurs due to excess money supply.

Measures to control Inflation

It can be controlled because inflation affects the economy as a whole seriously. It occurs due to the excessive supply of money, excessive expenditure, and scarcity of goods. Hence, it can be controlled by reducing money supply and expenditure and increasing production.

Following are the measure

1. Monetary Measure

Monetary policy is adopted to influence the money supply and credit. By changing interest rates and the availability of credit by the central bank. Following are the methods to control

a. Increase in bank rate: Increase in interest rate, encourage people to deposit cash in the bank. Which on other hand discourages people to overspend. Hence, It reduces the money supply to the public.

b. Open market operation:

In these cases, the central bank sells the government securities to the general people. People buy securities by borrowing money from the bank. Due to this cash reserves start to decrease in banks. But the bank can increase their reserve by selling their securities to the central bank to control inflation.

c. Increase in cash reserve:

The commercial bank should keep certain of their deposit from the customer with the central bank as a cash reserve. By increasing the cash reserve, the power of the banks to create credit is reduced. But this idea may fail if banks have a huge amount of reserve.

d. Consumer credit control:

This method helps excessive spending from customers. By purchasing durable goods on installment credit, loan facilities for installment buying are reduced to a minimum to check consumption spending.

e. Higher margin requirement

The differences between the market value of the security and its maximum loan value are Margin requirements. Bank does not give loans equal to the market value. Hence, during inflation, banks rise margin requirements to reduce loans on securities.

2. Fiscal Measures

The policy related to public expenditure, public revenue, and public debt is known as fiscal policy. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals.

a. Reduction in public expenditure

Government should ban unnecessary commodities like luxury cars, Mobile Phones, etc. Moreover, People should take control of their spending. Hence, it will be helpful in controlling inflation.

b. Increase in taxation

An increase in tax makes products a bit expensive. Hence, it will reduce the consumption of the goods. Moreover, people will buy very basic goods only.

c. Public borrowing

The government can take loans voluntarily or using force. Hence, it will reduce the purchasing power of the people. Therefore, people will consume lesser than they normally do.

d. Control of deficit financing

Deficit financing means government expenditure over its revenue by printing new currency. In order to control inflation, the government should minimize the deficit finance. Hence, Government should sell bonds to people or banks. Similarly, the government can control deficit financing by using saving or taking loans from the public.

e. Debt  management

Government should stop the repayment of loans to the public and financial institutions. Instead, the government should borrow money from the public and financial institutions. It reduces the overflow of money in the market. Hence, It will be helpful to control inflation.

3. Direct control of price

Following are the two measure

a. Direct control on price: Under this, the upper limit of the price is fixed. People can buy and sell at a lower price but not at a higher price.

b. Rationing: When the government fixes the quota of certain goods, it is called rationing. Rationing is done for essential consumer goods. Since they are relatively scarce. The purpose of rationing is to divert consumption from the goods. Whose supply needs to be restricted for some special purpose.

4. Other Measure

Besides monetary, fiscal, and direct measures, there are some other measures to control inflation. Which are an expansion of output, proper wage policy, saving, and overvaluation of the domestic currency.

Hence, these are the Measure to control inflation.

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