How can inflation be controlled?

Asked on by bilal05

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

There are a number of ways to control inflation.  I will discuss two important ones.

First, a country must not allow its money supply to get too large.  It must not print too much money.  If it does, it will face demand-pull inflation.  There are currently fears that the Federal Reserve in the US will cause inflation with its policy of creating new money by buying government bonds (quantitative easing).

Second, a country should try to ensure that aggregate supply increases steadily.  When an economy is growing due to an increase in supply, prices do not rise because demand does not tend to outstrip supply.  Of course, this is much easier said than done.

In general, countries must keep demand from outgrowing supply.  The methods I have discussed above are two ways of doing it -- the first keeps the lid on aggregate demand and the second increases aggregate supply.

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