Answer to Question #262932 in Management for Mareeye

Question

Describe Inflation and how it is measured? Ascertain the Fiscal and Monetary policies that are generally adopted to curb inflation. 

Answer 1

What is inflation?

Inflation is persistent increase in the general prices of goods and products. This occurs when income is greater than the rate of growth of real output. This causes general prices to increase and thus decreasing the value of money.

How it is measured.

The commonly used indicator of inflation is the Consumer Price Index which is designed to measure the percentage change in price of a basket of goods and services that households consume.

Two monetary and two fiscal measures to control inflation.

1.     Fiscal Measures

a)     Credit control

The central bank of a country should take measures to reduce credit which in turn controls the amount of money in circulation

b)     Control of money supply

Government should impose strict restrictions on the issue of money by the Central bank.

2.     Monetary Measures.

a)     Increase taxes

Taxes should be increased to reduce the amount of disposable income for the consumers and thereby reducing their expenditures. This can be done through direct or indirect taxes.

b)     Reduced public expenditure

Government expenditure should be reduced and especially on non-developmental activities. This is because government expenditure forms part of aggregate demand.