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Measures To Control Inflation

 Measures to Control Inflation
  • Monetary measures
  • Credit control is one of the significant monetary measures strategies. The central bank of the nation follows a number of ways to control the quantity and quality of credit. For this cause, it raises the bank rates sells securities in the open market, raises the reserve ratio and follows a number selective credit control measures such as raising margin requirements and regulating consumer credit.

    But one of the monetary measures is to demonetise currency of higher denominations. Such measures are usually followed when there is more of black money in the nation.

    The most tremendous monetary measure is the issue of new currency in place of the old ones. Under this operation, one new currency note is negotiated for a number of currency notes of the old ones. The value of bank deposits is also set respectively.

  • Fiscal Measures
  • Fiscal measures such as slashing down unwanted expenditure, rise in taxes, rise in savings, surplus budgeting and public debt.

    Similar to monetary measures fiscal measures alone cannot help in controlling inflation and they should be surrogated by monetary, non-monetary and non-fiscal measures.

Meaning of Deflation

The contra to the term inflation is deflation. It is “a state in which the value of money is raising i.e. prices are falling.” It is commonly related with dropping performance and employment. As pointed out by Coulborn “Involuntary redundancy is the hall-mark of deflation.” Deflation is occurred when prices are dropping more than rationally to the productivity of goods and services in the fiscal system consequently decline in the money supply.

Measures to Control Deflation

  • Monetary Policy
  • To control deflation, the central bank can hike the reserves of commercial banks through a cheap monetary strategy. They can do so by buying securities and deducting the interest rate. Consequently, their ability to extend credit facilities to borrowers enhances. But the experience of the Great Depression tells us that in a serious depression when there is negativity between industrialists, the victory of such a policy is practically zero. In such a condition banks are helpless in fetching about a renewal.

    The issue of borrowing for long term capital goods does not arise during deflation when the business performance is already at a very meagre level. All that banks can do is to make credit available but they cannot force industrialists and consumers accept it.

  • Fiscal Policy
  • Fiscal policy through increase in public outlay and reduction in taxes leads to raise national earnings, employment, productivity and prices. An increase in public outlay during deflation hikes the total demand for goods and services and tends to a large increase in earnings via the multiplier process while a deduction in taxes has the effect of raising disposable earnings thereby enhancing consumption and investment outlay through of the people.

    The statute should increase its expenditure on such public works as building roads, dams, schools, canals, parks hospitals etc. and on such relief measures as redundancy insurance pensions etc.

    Outlay on public works creates demand for the products of private construction industries and helps in bracing them whilst outlay on relief measures kindles the demand for consumer goods industries. Deduction in such taxes as corporate profit tax, income tax and excise taxes is likely to leave more earnings for expending and investment. Borrowing by the administration to fund budget deficits utilises idle money lying with banks and financial institutions for investment functions.

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