Controlling Inflation
NCERT Class 12 • Introductory Macroeconomics • Chapters on money and government budget | NCERT Class 11 • Indian Economic Development
Controlling Inflation
Inflation is controlled by acting on the side from which it came. If prices are rising because demand is too high, the cure is to reduce demand. If prices are rising because production costs have gone up or supply has fallen, the cure lies in easing supply. Using the wrong instrument can make matters worse.
Monetary and Fiscal Measures
- Monetary measures are taken by the central bank to reduce the money supply and credit.
- Raising the repo rate, the cash reserve ratio and the statutory liquidity ratio all reduce lending capacity.
- Selling government securities in open market operations absorbs money from the system.
- Fiscal measures are taken by the government through its budget.
- Reducing government expenditure and raising direct taxes both cut the purchasing power in people's hands.
- Reducing the fiscal deficit reduces the pressure on prices that borrowing and spending create.
- Cutting indirect taxes such as duty on fuel can lower prices directly, since those taxes are part of the price.
Supply Side and Administrative Measures
- Raising production of food grain and essential goods is the most direct long term answer.
- Imports of scarce goods can fill a temporary gap and calm prices.
- A buffer stock of food grain is built in good years and released when prices rise.
- The public distribution system supplies essentials at controlled prices to protect the poor.
- Acting against hoarding and black marketing keeps artificially created scarcity in check.
- Better storage, roads and market links reduce wastage, which by itself increases effective supply.
- Wage restraint and productivity gains together keep cost push pressure under control.
- Keeping inflation expectations anchored is as important as the actual rate, since expectations feed into wages and prices.
| Measure Type | Instrument | Works Best Against |
|---|---|---|
| Monetary | Repo rate, CRR, SLR | Demand pull inflation |
| Fiscal | Lower spending, higher direct tax | Demand pull inflation |
| Supply side | Production, imports, buffer stock | Cost push inflation |
| Administrative | Anti hoarding, public distribution | Artificial scarcity |
Buffer stock — a reserve of food grain built up in surplus years and released in years of scarcity to stabilise prices.
Exam me kaise aata hai
- Raising the repo rate is which kind of measure — monetary
- Reducing government expenditure is which kind of measure — fiscal
- Grain kept for release during scarcity is called — buffer stock
- Which measure works best against cost push inflation — supply side measures
UPSC/State PSC ke liye
- Tightening money against a supply shock can deepen a slowdown without controlling prices, which is the classic policy error in stagflation.
- Buffer stock works only with matching storage and distribution capacity, otherwise grain rots while prices still rise.
Yahan confuse hote hain
✗ All inflation is cured by raising interest rates | Cost push inflation needs supply side action instead | ✓
✗ Buffer stock means banning exports | Buffer stock is grain stored and released to steady prices | ✓
✗ Raising indirect taxes controls inflation | Indirect taxes are part of the price and can raise it further | ✓
Ek nazar me
- The cure must match the cause of inflation.
- Monetary: higher repo, CRR, SLR and open market sales.
- Fiscal: lower spending, higher direct tax, smaller deficit.
- Supply side: more production, imports, buffer stock and anti hoarding action.
Ab practice karein
Inflation aur price index se har exam me concept based questions aate hain. ExamAtlas ke mock test se abhi practice karein.