18755804-Control-Inflation-and-Conclusion

18755804-Control-Inflation-and-Conclusion - 1 Causes of...

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1 Causes of Inflation MEASURES TO CONTROL INFLATION We have studied above that inflation is caused by the failure of aggregate supply to equal the increase in aggregate demand. Inflation can, therefore, be controlled by increasing the supplies and reducing money incomes in order to control aggregate demand. The various methods are usually grouped under three heads: Monetary measures, fiscal measures and other measures. 1. Monetary Measures Monetary measures aim at reducing money incomes. (a) Credit Control. One of the important monetary measures is monetary policy. The central bank of the country adopts a number of methods to control the quantity and quality of credit. For this purpose, it raises the bank rates, sells securities in the open market, raises the reserve ratio, and adopts a number of selective credit control measures, such as raising margin requirements and regulating consumer credit. Monetary policy may not be effective in controlling inflation, if inflation is due to cost-push factors. Monetary policy can only be helpful in controlling inflation due to demand-pull factors. (b) Demonetization of Currency. However, one of the monetary measures is to demonetize currency of higher denominations. Such a measure is usually adopted when there is abundance of black money in the country. (c) Issue of New Currency. The most extreme monetary measure is the issue of new currency in place of the old currency. Under this system, one new note is exchanged for a number of notes of the old currency. The value of bank deposits is also fixed accordingly. Such a measure is adopted when there is an excessive issue of notes and there is hyperinflation in the country. It is very effective measure. But is inequitable for its hurts the small depositors the most. 2. Fiscal Measures
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This note was uploaded on 02/07/2011 for the course ECON 3461 taught by Professor Spencer during the Spring '10 term at Golden West College.

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18755804-Control-Inflation-and-Conclusion - 1 Causes of...

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