This article guides you about how to control inflation and deflation of economy.
Control of Inflation:
It is, therefore, clear that inflation cannot be allowed to go unchecked and the various monetary and fiscal measures have to be adopted to combat it.
Since it is caused by an excess of effective demand, measures to control it imply a reduction in the total effective demand.
Amongst the monetary measures we include higher bank rate, open-market operations, higher reserve requirements, consumer credit control, higher margin requirements, compulsory saving etc.
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Fiscal measures with respect to inflation include government spending, taxes, public borrowing, saving, debt management etc. Besides monetary and fiscal measures, there are important non-monetary anti-inflation measures which include output adjustment, suitable wage policy, price control, rationing, etc. These measures are, however, supplementary to main monetary and fiscal measures.
Control of Deflation:
Deflation adversely affects the level of production, business activity and employment and, therefore, it is equally essential to control it. During deflation the bank rate is lowered and securities are purchased through the open market operations and the volume of money and credit is expanded in every possible way. This policy is known as cheap-money policy. The idea is that with an increase in the quantum of money and credit, there will be increase in investment, production and employment. But these monetary measures alone may prove inadequate.
Mere expansion of money and credit may fail to revive economic activity, for the entrepreneurs may not be willing to expand investment (as anticipated) for want of necessary optimism. So, these monetary measures to combat deflation have to be combined with the fiscal measures like increased expenditure through deficit financing, tax concession and public works programmes, thereby providing jobs to unemployed people and generating the necessary effective demand needed for recovery.
These monetary and fiscal measures will prove more effective if combined with other measures, like the price support programmes, (i.e., to prevent the prices from falling below a certain level), lowering of wages and other costs to bring about adjustment between the price-cost structure. The best remedy to fight deflation is to have a ready programme of public works to be resorted to, as and when unemployment appears.