Economics is the social science that analyzes the production, distribution, and consumption of goods and services.

Monday, 3 October 2011

Remedies/ Ways to control inflation

Remedies/ Ways to control inflation

There are 3 main ways by which inflation can be controlled.

a.  Monetary Policy ; controlled by central bank of the country

                 i. Open market operation

The inflation require the central bank to reduce the cash. So, the bank will sell equity or bond in the open market operation.

                 ii.  Interest rate

In times of inflation the interest rate should be increased. Increasing in interest rate would discourage the consumption and investment. So, it will be reduce the aggregate demand, thus reducing inflation.

b. Fiscal policy; controlled by government via instruments taxes and government expenditure.

Fiscal policy deals with government expenditure and taxes. During inflation, government can increase the taxes. So, the value of consumption will decline and the aggregate demand will falls. So, the inflation can be reduced.

c.  Direct or physical control

                 i. Price pegging
The government will fix the floor and ceiling prices so that prices will not increase rapidly. As a result the producer will not be able to increase prices according to their own desires. So, the problems of inflation will be reduced.

                    ii. Encourage saving

The government increases the contribution to employees’ provident fund (EPF) or the bankers would be increase the rates or saving.

                    iii. Price tagging
Every product in the markets need to labeled to prevent producers over charging to consumers.