Question

How does a country control inflation?

Answer 1

A Government uses different instruments to control inflation in the country. Governments could ask the banks to keep more money as reserve to control flow of liquid cash in the market. Governments can increase interest rates and decrease bond prices. These are done to reduce money supply in the market. This is a contractionary monetary policy. Governments can implement price and wage control measures but that causes loss of jobs and recession.

The Government controls its spending when the expenditure from the private side is high. Governments can reduce private spending by increasing taxes. This is one of the fiscal policies of the Governments to control inflation.