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Measures to Control Inflation

Measures to Control Inflation

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Categories:Types, Business/Law
Published by: arjun-chopra-4887 on Sep 06, 2010
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11/10/2012

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Measures to control Inflation
Monetry Policy & Fiscal PolicyMonetarists emphasize keeping the growth rate of money steady, and using monetary policyto control inflation (increasing interest rates, slowing the rise in the moneysupply). Keynesians emphasize reducingaggregate demandduring economic expansionsand increasing demand during recessions to keep inflation stable. Control of aggregatedemand can be achieved using both monetary policy and fiscal policy(increased taxation or reduced government spending to reduce demand).Wage and Price ControlAnother method attempted in the past have been wage and price controls ("incomes policies"). Wage and price controls have been successful in wartime environments incombination with rationing. However, their use in other contexts is far more mixed. Notable failures of their use include the 1972 imposition of wage and price controls byRichard Nixon. More successful examples include the Prices and Incomes Accord in Australia and theWassenaar Agreement in the Netherlands. In general wage and price controls are regarded as a temporary and exceptional measure,only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regimeCost of Living allowanceIn many countries, employment contracts, pension benefits, and government entitlements(such associal security
 
) are tied to a cost-of-living index, typically to theconsumer priceindex.
 A
cost-of-living allowance
(COLA) adjusts salaries based on changes in a cost-of-living index. Salaries are typically adjusted annually in low inflation economies.During hyperinflation they are adjusted more often.
 They may also be tied to a cost-of-living index that varies by geographic location if the employee moves.Gold StandardThe gold standard is a monetary system in which a region's common media of exchangeare paper notes that are normally freely convertible into pre-set, fixed quantities of gold.The standard specifies how the gold backing would be implemented, including theamount of specieper currency unit.Under a gold standard, the long term rate of inflation (or deflation) would be determined by the growth rate of the supply of gold relative to total output.
Critics argue that thiswill cause arbitrary fluctuations in the inflation rate, and that monetary policy wouldessentially be determined by gold mining,
which some believe contributed to theGreat Depression

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