Measure to check inflation includes ________.
Measure to check inflation includes ________.
The correct option is D all the three
Inflation is an
economic situation where the general price level in the economy for all the
relevant goods has a constant appreciable rise over a considerable period of
time. The measures to check inflation includes: 1. Fiscal policies: Fiscal policies refers to the measures which are directly taken by the government to check inflation and deflation in the economy. These measures are as follows: (i) Increase in direct tax: By increasing the direct tax, the real income of public would decrease as a result of which the purchasing power will fall which will ultimately correct inflation as there will be no excess demand in the economy. (ii) Increase in indirect tax on luxury goods: By increasing the indirect tax on luxury goods,the demand of these goods will fall as the real income of people would be decreased as a result of which excess demand would be balanced in the economy and inflation will be corrected. (iii) Check in Public expenditure: Government can also cut its public expenditure on developing infrastructure, health, education etc. which will decrease the money supply in the economy as a result of which real income would fall and inflation would be corrected.
2. Monetary policies: Monetary policies refers to the quantitative and qualitative measures taken by the central bank to correct the situation of inflation and deflation in the economy. These measures are as follows: (i) Quantitative measures of monetary policy includes those instruments which focus on the overall supply
of the money. It includes:
A. Two Policy
Rates:
Increasing bank rate: Bank rate is
the rate charged on the loans offered by the Central bank to the commercial
banks without any collateral. It is increased at the time of inflation to
reduce the money supply in the economy.
Increasing repo rate: Repo
rate is the rate charged on the secured loans offered by the Central bank
to the commercial banks that includes collateral. It is increased at the time
of inflation to reduce the money supply
in the economy.
B. Two Policy
Ratio:
Increasing SLR: Statutory
Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must
hold on daily basis as a percentage of their total deposits. SLR is determined
by the central bank and is a legal requirement to be fulfilled by the
commercial banks. It is increased at the time of inflation to reduce
the money supply in the economy.
Cash Reserves
Ratio (CRR) refers to the proportion of total deposits of the commercial
banks which they must have keep as cash reserves with the central bank. The
ratio is fixed by the central bank and is increased during inflation to reduce the credit creation capacity of the commercial banks which decreases the money supply in the economy.
C. Open Market
Operations:
Open market
operation (OMO) is a monetary policy by the central bank in which the bank
deals in the sale and purchase of securities in the open market to control the
supply of money in the economy. By selling the securities, the central bank
soaks liquidity from the economy and corrects the situation of inflation in the economy.
(ii) Qualitative Methods of monetary policy includes
those instruments which focus on the selected sectors of the economy. It
includes:
A. Margin
Requirement:
Margin
requirement refers to the difference between the current value of the security
offered for loan (called collateral) and the value of loan granted. It is
a qualitative method of credit control adopted by the central bank in order to
stabilize the economy from inflation or deflation. Margin requirement is increased during inflation to restrict the follow of credit.
B. Rationing
of Credit:
Rationing of
credit refers to fixation of credit quotas for different business activities
which is introduced when the flow of credit is to be checked particularly for
speculative activities in the economy.
C. Moral
Suasion:
The central
bank makes the member bank agree through persuasion or pressure to follow its
directives which is generally not ignored by the member banks. The banks are
advised to restrict the flow of credit during inflation.
3. Increase in production: One of the best way to tackle inflation is to increase the
production of commodities in the economy. So when the productivity is increased
in the economy, it will automatically increase the supply which will balance
the excess demand in the economy and inflation will be corrected.
Inflation is an economic situation where the general price level in the economy for all the relevant goods has a constant appreciable rise over a considerable period of time. The measures to check inflation includes:
(i) Quantitative measures of monetary policy includes those instruments which focus on the overall supply of the money. It includes:
A. Two Policy Rates:
Increasing bank rate: Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. It is increased at the time of inflation to reduce the money supply in the economy.
Increasing repo rate: Repo rate is the rate charged on the secured loans offered by the Central bank to the commercial banks that includes collateral. It is increased at the time of inflation to reduce the money supply in the economy.
B. Two Policy Ratio:
Increasing SLR: Statutory Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must hold on daily basis as a percentage of their total deposits. SLR is determined by the central bank and is a legal requirement to be fulfilled by the commercial banks. It is increased at the time of inflation to reduce the money supply in the economy.
Cash Reserves
Ratio (CRR) refers to the proportion of total deposits of the commercial
banks which they must have keep as cash reserves with the central bank. The
ratio is fixed by the central bank and is increased during inflation to reduce the credit creation capacity of the commercial banks which decreases the money supply in the economy.
C. Open Market
Operations:
Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities in the open market to control the supply of money in the economy. By selling the securities, the central bank soaks liquidity from the economy and corrects the situation of inflation in the economy.
(ii) Qualitative Methods of monetary policy includes
those instruments which focus on the selected sectors of the economy. It
includes:
A. Margin Requirement:
Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation. Margin requirement is increased during inflation to restrict the follow of credit.
B. Rationing
of Credit:
Rationing of credit refers to fixation of credit quotas for different business activities which is introduced when the flow of credit is to be checked particularly for speculative activities in the economy.
C. Moral Suasion:
The central bank makes the member bank agree through persuasion or pressure to follow its directives which is generally not ignored by the member banks. The banks are advised to restrict the flow of credit during inflation.
3. Increase in production: One of the best way to tackle inflation is to increase the
production of commodities in the economy. So when the productivity is increased
in the economy, it will automatically increase the supply which will balance
the excess demand in the economy and inflation will be corrected.
