Answer to Question #219977 in Microeconomics for Sushant99

Question

What is Inflation? How it is measured? What Fiscal and Monetary policies are generally adopted to curb inflation?

Answer 1

What is Inflation?

Inflation refers to the gradual deterioration of a currency's buying power over time. A quantitative indication of the pace of loss in buying power may be found in the growth in an economy's exchange rate for a portfolio of specified goods and services over time. The increase in the overall level of prices, which is sometimes represented as a percentage, implies that a currency unit now purchases less than what it did previously.

How it is measured? 

The Consumer Price Index (CPI) is perhaps the most widely used inflation indicator. It reflects the percentage difference between the cost of a basket of services and goods purchased by people. Mathematically,

Percentage inflation rate = (Final CPI Index Value/Initial CPI Value)*100

What Fiscal and Monetary policies are generally adopted to curb inflation?

The administration can raise taxes (such as income tax and VAT) while decreasing spending. This enhances the government's fiscal condition and helps to lower economic demand.

Both of these measures lower inflation by slowing consumer spending growth. Reduced AD growth can lower rising inflation without creating a recession if economic growth is rapid.

Reduced economic growth will be more unpleasant if a country had massive inflation and slow growth, as lowering inflation would result in reduced production and more joblessness. They might still cut inflation, but the economy would suffer greatly as a result.