Define Inflation. Explain any two fiscal measures and two monetary measures to control it.
Inflation is defined as "a sustained rising trend in general price level or a rate of expansion of money: income greater than the rate of growth of real output." Under such circumstances, the general price increases and in turn the value of money decreases. Although, the circulation of money increases, the availability of goods is limited and this results in price rise.
Two fiscal and two monetary measures to control inflation are:
(A) Monetary Measures:
(i) Reduction in public expenditure: Since public expenditure is an important component of aggregate demand, steps should be taken to reduce unnecessary Government expenditures on non-developmental activities. For example, expenditure on defence and unproductive activities should be reduced.
(ii) Increase in taxes: To cut private consumption expenditure, there should be an increase in taxes. Both direct and indirect taxes can be used for this purpose. Direct taxes (e.g. income tax, corporate tax etc.) reduce the disposable income of the tax-payers and thereby reduce the consumption expenditures. Likewise indirect taxes (e.g. sales tax, excise duties etc.) also reduce the aggregate demand by making the goods costlier. Moreover, the Government should also penalise the tax evaders by imposing heavy fine. Such measures are bound to be effective in controlling inflation.
(B) Fiscal Measures:
(i) Control over money supply: To check inflation, it is suggested that Government should impose strict restrictions on the issue of money by the central bank.
(ii) Control on credit: The central bank of the country should take necessary steps to contract credit because credit forms a major part of money supply. More credit means more supply of money.
Inflation is defined as "a sustained rising trend in general price level or a rate of expansion of money: income greater than the rate of growth of real output." Under such circumstances, the general price increases and in turn the value of money decreases. Although, the circulation of money increases, the availability of goods is limited and this results in price rise.
Two fiscal and two monetary measures to control inflation are:
(A) Monetary Measures:
(i) Reduction in public expenditure: Since public expenditure is an important component of aggregate demand, steps should be taken to reduce unnecessary Government expenditures on non-developmental activities. For example, expenditure on defence and unproductive activities should be reduced.
(ii) Increase in taxes: To cut private consumption expenditure, there should be an increase in taxes. Both direct and indirect taxes can be used for this purpose. Direct taxes (e.g. income tax, corporate tax etc.) reduce the disposable income of the tax-payers and thereby reduce the consumption expenditures. Likewise indirect taxes (e.g. sales tax, excise duties etc.) also reduce the aggregate demand by making the goods costlier. Moreover, the Government should also penalise the tax evaders by imposing heavy fine. Such measures are bound to be effective in controlling inflation.
(B) Fiscal Measures:
(i) Control over money supply: To check inflation, it is suggested that Government should impose strict restrictions on the issue of money by the central bank.
(ii) Control on credit: The central bank of the country should take necessary steps to contract credit because credit forms a major part of money supply. More credit means more supply of money.
