Control of Inflation/Deflation - SS2 Economics Lesson Note

Central banks and governments use various tools to manage inflation and deflation. Controlling inflation and deflation is essential for maintaining economic stability. Governments and central banks use various tools such as monetary and fiscal policy, exchange rate policy, and quantitative easing to manage these economic forces.

 

Control of inflation

• Monetary policy: Central banks use monetary policy to control the money supply and influence interest rates. By decreasing the money supply, central banks can reduce demand and control inflation.

Fiscal policy: Governments can also use fiscal policy to control inflation by adjusting taxes and government spending. By increasing taxes or decreasing government spending, they can reduce demand and control inflation.

Exchange rate policy: Central banks can adjust the exchange rate of the national currency to manage inflation. A higher exchange rate can decrease demand for imports and control inflation.

 

Control of deflation:

• Expansionary monetary policy: Central banks can use expansionary monetary policy to increase the money supply and stimulate demand to combat deflation.

Fiscal policy: Governments can increase government spending or decrease taxes to stimulate demand and combat deflation.

Quantitative easing: Central banks can use quantitative easing, which involves buying government bonds and other securities to increase the money supply and stimulate demand.