gcse economics - the big picture: remedies for inflation

How to reduce the level of inflation in an economy

1. REDUCE DEMAND PRESSURES

If inflation is caused by high demand then

* Raise interest rates to reduce consumers disposable incomes
* Raise interest rates to discourage borrowing and demand
* Raise taxes to reduce disposable income and spending
* These policies should all reduce peoples ability to spend too much money

2 REDUCE COST PUSH PRESSURES

If inflation is caused by high costs

• Limit wage increases if possible e.g. public sector workers
• Force electricity and gas companies to hold their prices
• Increase the value of £ in order to reduce the cost of importing

3. REDUCE MONEY SUPPLY PRESSURES

If inflation is caused by too much money in the economy

• Print less money
• Withdraw some money from circulation.

Each of the above approaches has its advantages and disadvantages.

POLICY 1 is effective but will be unpopular with consumers and may cause a minor recession

POLICY 2 could be effective but it is very difficult for the government to tell private firms how much to charge for inputs and also how much to pay their workers

ACTION

A Why will a rise in interest rates reduce demand in the economy?