Monday, 25 August 2014

Policies To Reduce Inflation

Policies To Reduce Inflation

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.

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