Did you know that inflation up to 2% annually is actually beneficial for the economy? That’s correct. But anything beyond moderate inflation can be disastrous for the economy. So the government takes certain measures to check inflation. Let us take a more detailed look.
Measures to Check Inflation
Inflation is an economic phenomenon used to describe the rising prices of goods and services year on year. This caused the purchasing power of the consumer decrease because the rate of increase of wages and income cannot keep up with the rate of inflation.
However, controlling inflation is not a simple task. The rise in prices is a result of many factors like aggregate demand, increasing the supply of money, etc. So to control inflation we need many measures working in tandem. There are three main measures to check inflation. Let us take a look.
1] Monetary Measures
The government will employ many policies and formulas to keep the inflation rate in check. One of the most common and often used measures to do so are monetary measures. Here, the government with the help of the Reserve Bank of India attempt to control the supply of money and credit in the economy. Controlling the liquidity levels in the market is an effective way to check inflation in the economy.
Some of the steps the government may take to check inflation are as follows,
- Increase the bank rate. This makes loans and advances more expensive for the common public. And so they will spend less money on goods and commodities.
- Employ other such open market operations to reduce the level of liquidity in the economy
- The RBI also changes its Cash Reserve Ratio, as a tool to control the amount of money and credit in the market
Browse more Topics under Money And Money Market
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2] Fiscal Measures
Another one of the measures to check inflation are the fiscal measures that the government takes. There are two main components of these fiscal measures to control inflation. One is the reduction of private spending (which increases government revenue) and the other is the reduction in government spending or expenditure.
Of the two. it is more preferable to control private spending. This is done by increasing the taxes and tax liabilities of private companies and businesses. This, in turn, forces the companies to spend less money thus controlling inflation.
When this is not possible, the government can limit government expenditure. However, this is not the best scenario as it may delay important social welfare programmes related to education, health and other such important aspects of the society.
3] Price Control
Another of the measures to control inflation is price control. So in times of rapidly increasing inflation, the government may simply prevent any further increase in the prices of commodities. So for the time being the increasing prices are suppressed. But by no means is this a long term solution.
So price control cannot by itself control the rate of inflation of an economy in the long term. It works as a relatively short term measure. Like in the times of war and post-war when the government imposes price controls to deal with the rapid rise of prices of commodities.
Solved Question on Measures to Check Inflation
Q: Which of these is another short term measure to control inflation?
- accelerating economic growth
- fiscal measures
- importing basic goods if necessary
- all of the above.
Ans: The correct answer is option C. The government can import basic goods to meet with the demands and ease of the rise in prices. But this is strictly a short term measure. In the long term, domestic demand must be met by domestic supply.