In my previous posts I explained about the Impact of inflation over macro-economic factors. In this post lets see how can this inflation be controlled. There are broadly two ways of controlling inflation in an economy – Monetary measures and fiscal measures.
The most important and commonly used method to control inflation is monetary policy of the Central Bank. Most central banks use high interest rates as the traditional way to fight or prevent inflation. Monetary measures used to control inflation include (i) bank rate policy (ii) cash reserve ratio and (iii) open market operations. Besides these monetary policy steps, the fiscal measures to control inflation include taxation, government expenditure and public borrowings. The government can also take some protectionist measures such as banning the export of essential items such as pulses, cereals and oils to support the domestic consumption, encourage imports by lowering duties on import items etc..,
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