Disinflation Government Policy

Disinflation Government Policy

Disinflation, Government policy designed to remove inflationary pressures from the economy and maintain the value of the monetary unit. Methods employed in post-war years have included direct restrictions on consumer expenditure by rationing, hire purchase controls, a budget surplus (to 'mop up' purchasing power), raising interest rates, credit squeezes and other measures to check spending out of borrowed funds.

There is no secret about the cure of inflation: either the supply of goods and services must increase without a parallel increase in money earnings, or total monetary demand must be reduced. Rationing and price controls tend to suppress rather than to cure inflation; if such measures are general and absolute, they can be enforced only by stringent penalties. There are two difficulties in working disinflation policies. They may for a time reduce the amount of employment far below the level that is politically acceptable: this calls for better public understanding of the alternatives and an awareness of the need to choose between evils. There is also the danger that disinflation will become deflation, i.e. that the measures will go too far; the solution here lies in more knowledge of the economic system and how it is reacting to economic policies, and this in turn calls for more up-to-date information about the key 'indicators ' output, prices, investment, stocks, orders, etc. The need for disinflationary measures is eased to the extent, on the supply side, that productivity rises. Total monetary demand may be reduced by (1)an increase in private savings, (2) an increase in taxation relatively to Government spending, specific measures to reduce consumption and investent expenditures, (4) a reduction in Government expenditure relatively to taxation.

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