Friday, July 27, 2012

How to manage inflation without affecting economic growth?

Hyperinflation is very bad for economic growth. But low inflation has some positive effect on economy & we know  ‘If we don't want to increase interest rate, we could reduce inflation through reducing consumption but this will affects economic growth as demand will decrease.’ In this case, a country takes some selective measures to manage inflation within single digit concerning economic growth:-
a)   Open market operation: During inflation, the central bank sells govt. securities and price bonds in the open market in order to contract the supply of money. This policy should not affect economic growth.
b)   Increase the supply of goods and services: When the supply of goods and services is increased, the prices will come down.
c)   Reduction unnecessary expenditure: the govt. should reduce unnecessary non-development expenditure to curb inflation.
d)   Reducing import duty: To increase the supply of goods within the country in low price, the government should reduce import duties.
e)    Price Control: Price control and rationing is another measure of direct control to check inflation. Price control means fixing an upper limit for the prices of essential consumer goods by law.
f)     Selective credit control: selective controls are designed to influence specific sectors of the economy which are most vulnerable to fluctuations and require to be controlled without affecting the economy as a whole. The aim of selective controls is to restrict the use of credit for such forms of activity as are regarded to be relatively unessential or less desirable.

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