What are some of the ways by which inflation can be reduced?
Answer:
By stopping people from overspending therefore reducing the amount of cash floating around. The most usual way is to raise interest rates which will make borrowing more expensive and thereby giving people less money to spend. Dont forget that the vast majority of the working population has debts most notably a mortgage.
Deflation
Passing a law to restrict pay increases.
Raising interest rates to reduce borrowing
Restricting price increases in the public sector such as post.
Index linking benefits to reduce consumer spending
The way you reduce inflation is by curbing economic growth. Growth can be reduced by fiscal or monetary means. Think of inflation as "too much money chasing too few goods". So you want to decrease the amount of money in the economy.
The problem with using fiscal means is that there is a big time lag. Curbing spending or raising taxes is done once a year by budgets and are politically unpopular.
That leaves us with monetary policy IE raising interest rates. When you raise interest rates you make goods purchased on credit more expensive and thus you lessen the demand. This is especially true for items like housing and cars which are big engines for economic growth.
But the people who do take out credit or renew mortgages at higher interest rates make higher payments and have less disposable income to spend.
The government uses macroeconomic and microeconomic policies to achieve sustainable economic growth, which will allow real incomes to be increased whilst inflation is minimised. There are two conventional macroeconomic policy measures which are appropiate for reducing the rate of inflation:
1. A tightening of monetary policy through an increase in the official cash rate, leading to a rise in term structure of interest rates in the economy; and
2. Contractionary fiscal policy through an increase is taxation or reduced government expenditure, or a combination of the two measures.
The tightening of the stance of monetary policy stance would entail the Government Bank (Reserve Bank) raising the cash rate, which will lead to an increase in other short term interest rates and eventually longer term rates will also adjust upwards. This increase in interest rates will lead to a decreased incentive for businesses to invest and for consumers to spend. There will also be a greater incentive for households to save, and with the resulting decline in aggregate demand, there will be a reduced demand pull inflationary pressures in the economy.
Alternatively, contractionary fiscal policy entails an increase in the structural surplus or a reduction in the structural deficit of the budget. Regardless of whether a reduction in the level of government expenditure and/or an increase in the level of taxation is used to achieve the new fiscal policy stance, the effect will be a reduction in the net injection of funds from the government section (ie- net public demand) into the economy and a reduction in demand pull inflationary pressures.
It is also possible to argue that microeconomic policies can be used to achieve price stability but this would normally be in the context of longer term policy settings. Microeconomic policies are designed to foster structural changes in the economy that lead to higher levels of productivity, efficiency and competitiveness, all of which contribute to price stability and lower inflationary expectations.
Microeconomuc policies are most effective in containing cost inflationary pressures such as rises in wages not based on productivity improvements or rises in the price of raw materials and other productive inputs due to a lack of competition or efficiency in markets. Examples of microeconomic policies used to support the objective of price stability include:
- Tariff reform to increase competition from imports leading to lower prices;
- Taxation reform to remove indirect taxes such as sales tax which distort prices and raised cost structures for firms;
- The reform of public utlities (eg rail, power, water) to increase efficiency and lower prices;
- The deregulation of markets to increase levels of competition and lower prices; and
- The introduction of the principle of workplace or productivity bargaining in the labour market.
The answers post by the user, for information only, FunQA.com does not guarantee the right.
More Questions and Answers:
More Questions and Answers: