Policies To Reduce Inflation

1. MONETARY POLICY:

Increased interest rates will help reduce the growth of Aggregate Demand in the economy. The slower growth will then lead to lower inflation. Higher interest rates reduce consumer spending because:

• Increased interest rates increase the cost of borrowing, discouraging consumers from borrowing and spending.
• Increased interest rates make it more attractive to save money
• Increased interest rates reduce the disposable income of those with mortgages.
• Higher interest rates increased the value of the exchange rate leading to lower exports and more imports.

2. Supply Side Policies

Supply side policies aim to increase long term competitiveness and productivity. For example, privatisation and deregulation were hoped to make firms more productive. Therefore, in the long run supply side policies can help reduce inflationary pressures. However, supply side policies work very much in the long term. They cannot be used to reduce sudden increases in the inflation rate.

3. Fiscal Policy

This is another demand side policy, similar in effect to Monetary Policy. Fiscal policy involves the government changing tax and spending levels in order to influence the level of Aggregate Demand. To reduce inflationary pressures the government can increase tax and reduce government spending. This will reduce AD. This policy specially helps to control demand pull inflation.

4. Exchange Rate Policy

This involves increasing the value of currency to reduce imported inflation. Increase currency rate will also lead to fall in demand for exports. As a result aggregate demand will reduce which will help to control inflation,

5. Wage Control

Wage growth is a key factor in determining inflation. If wages increase quickly it will cause high inflation. If Govt.

COST OF INFLATION

Q. Explain the  Effects of Inflation? or what are the cost of Inflation? or What are the consiquences of inflation?

A-    Effects on different sectors of the economy:

1-  Effects on the distribution of income and wealth: Inflation causes the un-even distribution of wealth, which some people to have a luxurious life while others to spend their lives hand to mouth. Poor and middle class people are major targets of inflation. While businessmen, speculators etc earn maximum gains. Thus inflation creates an justified transfer of wealth and income from poor to rich.

2- Effects on production: Increasing prices make the producers to invest more in the production, it’s useful up to the full employment level, but investment beyond this level adversely effects the production.

3- Effects on the Government: During inflation government can impose more taxes on producers and hence it can earn more revenues during the period of inflation.

4-  Effects on the Balance of Payment: Balance of trade is also adversely effected by inflation, when the domestic products are costlier than that of products made in foreign countries, people prefer imported products, whish increases the imports and decreases the exports.

5-  Effects on Monetary Policy: Inflation causes the decline in the value of money, and ultimately the monetary system collapses.

6-  Effects on Social Sector: As inflation widens the gap between the poor and the rich, it causes social disorders in the society.

7-  Effects on Political environment: Hyper inflation also encourages the opposition parties to agitate and protest against the government which makes disturbance on the political stage of the country.

B- Effects on Different classes of the people:

1- Debtors & Creditors: During inflation debtors gain while creditors have to face the losses. This is because the debtors repay the less amount than that of the amount they have borrowed (because of the decline in the value of money).

2- Salaried Class: Salaried persons face a situation of loss because their salaries don’t increase at the same rate with which the prices are increasing.

3-   Wages earners: Wage earners also face loss because the wage rate is adjusted with the rate of inflation. If the unions are strong they can be protected, lest they have to face a tough time.

4-  Fixed income group: Fixed income group (pension, social securities earners etc) also face loss because they have to be content at their fix income.

5-  Investors and shareholders: Share holders of joint stock companies earn good profits during inflation while those who invest in the bonds, debentures and securities etc earn losses.

6-  Businessmen: Business class earns gains during inflation.

7- Agriculturists: Agriculturists both land lords and farmers have to undergo losses, because former get fix rents while later gets fix wages.