Government strategies to control inflation

What methods can the government use to control inflation? Generally, there is a fall in the wage inflation when there is an economic depression, leading to a rise in the unemployment rates.

Monetary Policy

Setting restrictions on the growth rate of wages may decrease cost push inflation. Movements in short-term interest rates also influence long-term interest rates--such as corporate bond rates and residential mortgage rates--because those rates reflect, among other factors, the current and expected future values of short-term rates.

It is a well-known fact that individuals generally prefer to save money in inflationary conditions. Lower wage growth helps to reduce cost-push inflation and helps to moderate demand-pull inflation. The government has several ways to control inflation.

Unconventional Monetary Policy In recent years, unconventional monetary policy has become more common. This policy, anyway, works only against demand caused inflation and faces great opposition from the people as they are made worse of by reducing spending on health-care etc.

Measures for Controlling Inflation (With Diagram)

However, supply side policies can take a long time, and cannot deal with inflation caused by rising demand. Another type of inflation is demand-pull inflation. When the federal funds rate is reduced, the resulting stronger demand for goods and services tends to push wages and other costs higher, reflecting the greater demand for workers and materials that are necessary for production.

Usually the normal work-time is reduced and as the workers work the same time they are paid an overtime rate. For this purpose, the government should float public loans carrying high rates of interest, start saving schemes with prize money, or lottery for long periods, etc.

When a country has lower inflation than others it tends to "import" inflation with its foreign trade because foreign goods get more expensive.

Movements in the federal funds rate are passed on to other short-term interest rates that influence borrowing costs for firms and households.

When a currency is worth less, its exchange rate weakens when compared to other currencies. In addition, it aims to keep long-term interest rates relatively low, and since has served as a bank regulator.

The primary purpose of these purchases was to help to lower the level of longer-term interest rates, thereby improving financial conditions. And indeed the velocity of Mo has increased from 10 in to 30 inbut the velocity of M4 is much smaller and actually decreased from to due to banks making the savings more attractive.

They should be supplemented by monetary, non-monetary and non-fiscal measures. This will also put a check on private expenditure which is dependent upon government demand for goods and services. This will have a dual effect.

Board of Governors of the Federal Reserve System

Involves increase or decrease in reserve ratios by the central bank to reduce the credit creation capacity of commercial banks. In addition, policy actions can influence expectations about how the economy will perform in the future, including expectations for prices and wages, and those expectations can themselves directly influence current inflation.

The main reasons for reduction in total expenditure of individuals are as follows; i Making the borrowing of money costlier: Monetarists would stress policies such as: If inflation expectations are low, it becomes easier to control inflation. The long-term means of controlling Inflation are as follows: For example, more flexible labour markets may help reduce inflationary pressure.

If a country had high inflation and negative growth, then reducing aggregate demand would be more unpalatable as reducing inflation would lead to lower output and higher unemployment. The effect of quantitative easing is to raise the price of securities, therefore lowering their yieldsas well as to increase total money supply.

The changing exchange rates also cause inflation. Related This entry was posted in economics. Thus, controlling Inflation is important as unrestrained increase of the prices may culminate in Hyperinflation, and an excessive fall in the prices may lead to Deflation.

Controlling Inflation: 3 Important Measures to Control Inflation

In such a case, the basic inflationary pressure in the economy is not exhibited in the form of rise in prices for a short time. The different measures as shown in Figure-5 used for controlling inflation are explained below.How does monetary policy influence inflation and employment? In the short run, monetary policy influences inflation and the economy-wide demand for goods and services--and, therefore, the demand for the employees who produce those goods and services--primarily through its influence on the financial conditions facing households and firms.

Controlling Inflation

Strategies for Controlling Inflation 9 policy-makers wanted to have lower unemployment, they could ‘buy’ it by accepting a higher rate of inflation. here are some of the measures that are taken by banks as well as goverment to control inflation.

There are many methods used by the government to control inflation; one popular method is through a contractionary monetary Read Answer >> How does monetary policy influence inflation?

What methods can the government use to control inflation?

With reference to the UK, examine and discuss the methods open to a government to control the rate of inflation within an economy. Inflation refers to an increase in the price level of goods and services in a given economy. Since inflation is concerned with increases in the cost of living rather.

Why and how does government attempt to control inflation? For hundreds of years before the 20th century the value of the pound had remained almost the same.

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Government strategies to control inflation
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