How to Control Inflation, Monetary & Fiscal Steps

Fri, 07/05/2013 - 11:15 -- Umar Farooq

Steps to control inflation are meant to balance the aggregate demand and the aggregate supply.

Monetary Steps

  1. Control on Money Supply. The central bank being the note issuing authority enjoys full powers to control the money supply injected through excessive credit creation. For the purpose it applies different instruments to control it. The instruments by which the central hank controls the money supply rate.
  2. Bank Rate. The rate at which the central' bank advances loans to other commercial hanks. To control inflation the CB increases the bank rate.
  3. Open Market Operation. The government increases the sale of its securities to collect money from banks, firms, firms and public.
  4. Cash Reserve Ratio. A percentage of the total deposits which a commercial bank keeps with the CB is increased.
  5. Cash Ratio Requirement: The percentage of total cash deposits which a commercial bank keeps so as to meet the demands of customers is increased.
  6. Credit Rationing. A certain quota is fixed by the CB beyond which no bank can get credit.

Fiscal Steps

  1. Reduction in Public / government expenditure. The government should reduce its non-developmental expenditures which will reduce the aggregate demand for goods & services thus it will be balanced with the aggregate supply
  2. Raising Taxes. To control inflation government should increase its taxes and to reduce the money supply by cutting the individual expenditure.
  3. Encouragement of Savings. Different ways should he adopted through which the people's capability and attitude to save is increased.
  4. Raising the Value of Currency. To reduce the inflationary pressure on the economy the value of money should be decreased
  5. The government should reduce its exports so as deficiency of goods may not occur domestic market.
  6. The government should increase the supply of goods by raising its imports.

Other Measures to Control Inflation

  1. Increase in production
  2. Control on Prices
  3. Rationing which means to make the scarce goods available to a large number population.