There are three ways of controlling inflation in an economy: Fiscal Policies:
Fiscal policies are effective in increasing the leakage rates from the circular income flow, thereby rejecting all further additions into this particular flow of income. Following are a few types of fiscal policies commonly employed: * Lowering the expenses on governmental level
* A fall in the borrowing amounts in the government sectors, on an annual basis * High direct taxes, for reducing the disposable income
Monetary Policies have a great role to play in controlling Inflation An escalation in the interest rates brings about a reduction in collective demands, in the following three ways: * A rise in the interest rate discourages borrowing from both companies and households. When interest rates increase, it simultaneously encourages the savings rate, owing to an escalation in the opportunity cost of expenditure.
* Rise in the interest rates is a very useful tool for restricting monetary inflation. Increase in the real rates of interest decreases the demand for loans, thereby limiting the growth of broad money.
* There may also be a fall in the commercial investments, due to a rise in the costs of borrowing money. This exerts a direct influence on a handful of planned investment-related projects, which turn out to be unprofitable . This leads to a fall in the collective demand.
* An increase in the payment of mortgage interests automatically decreases the real 'effective' disposable income of the house owners, as well as their spending capacities. Escalation in the mortgage costs also decreases the demand generated in the housing markets. Exchange Rates:
An escalation in the exchange rate is possible by increasing the rates of interest or buying money through the central bank interferences in the foreign exchange markets. The short-term means of controlling Inflation are as follows: * Income policies or...