How Governments Control Inflation
One of the principal duties of a government is to control the nation’s economy. Inflation is one of the more difficult duties for a government to conduct because the decisions they must make are usually unpopular with the people.
Inflation is a serious concern to many concerned citizens. They feel the need to educate themselves on the subject, since it has a direct impact on their daily lives. Citizens are becoming more aware and conscientious.
Inflation results when the cost of production causes an increase in consumer prices, or when there is an increase in wage costs. For example, a factory decides to increase employee wages but do not increase the amount of production.
Governments can control inflation in several ways. First is through fiscal policy. That is to say, they manage aggregate demand by means of government spending. To reduce inflation, they decrease the amount of expenditure while increasing taxes. This is very unpopular with citizens. This is because when taxes are increased while decreasing expenditure, less money is put into other social programs, such as health care and welfare.
The other popular form of control is through monetary policy. This form of control, which is used by the Conservative Party in UK, places great importance on controlling interest rates. By doing so, the government is able to restrict increases in either employee wages, or the prices of consumer prices, even things like the rates of equity release schemes. Although this pleases the common consumer, this is not a popular strategy in the eyes of merchants. There are two ways to conduct monetary policy: direct and indirect. In regards to direct monetary policy, the government strictly controls employee wage rates as well as consumer prices. On the other hand, indirect monetary policy is conducted with suggestions as opposed to rules. In other words, they request a stoppage of wage increases and the price of consumer products as opposed to creating strict policies without consulting corporations or the citizenry.
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