Measures for inflation control and monetary policy tools are essential topics in the discipline of economics. These subtopics are crucial for regulating the money in the economy, thus regulating trading activities. Inflation is the measure of the rising prices of services and goods within an economy. Monitoring the supply of money and distribution of goods and services is essential for preventing the effects of inflation. This is because it can significantly affect an economy’s operation of it goes beyond the expected rate. It is impossible to regulate inflation by a single measure; hence different criteria are applicable. These measures are for reducing cash inflow into the economy. The measures for inflation control are monetary measures, fiscal measures, and price control.
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MONETARY POLICY TOOLS USED IN REGULATING INFLATION
Monetary policy tools are one of the measures for inflation control. The governing bodies use these tools in influencing the availability of money and credit for the promotion of a healthy economy. The goals for monetary policy are increasing employment and stabilization of prices. Consequently, the two goals result in the stabilization of the economy. The goals are broad and complex; hence require regular evaluation and the making of necessary amendments. For example, the definition of maximum employment and stable prices keep changing. The monetary policy tools are reserve requirement, the discount rate, open market operations, interest on reserves, and overnight reserve repurchase agreements.
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THE EFFECTS OF INFLATION IN A COUNTRY’S ECONOMY
Inflations cause the rise of prices in a basket of goods and services. A basket of goods and services comprises the intermediate goods and services produces in an economy, and their prices are tracked over time. It is used as the measure of inflation over time, for example, the Consumer Price Index (CPI). The effects of inflation include the following. One, it erodes purchasing power by reducing the value of money. On the contrary, it encourages consumer spending on items that are slower to losing value. Secondly, it raises the cost of borrowing by increasing the level of interest rates. Thirdly, it causes the weakening of the currency. As a result, making exports expensive, thus discouraging trading activities. Therefore, the measures for inflation control are crucial in preventing disastrous outcomes.
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