Policies to Control Inflation & Deflation | Economics for GCSE/IGCSE - Year 11 PDF Download

Policies To Tackle Inflation

• Demand-pull inflation is effectively mitigated through contractionary demand-side policies.
  • Contractionary fiscal policy and contractionary monetary policy are designed to diminish total (aggregate) demand within an economy.
  • A reduction in the total demand for goods and services leads to a decline in the general price level, thereby alleviating inflation.
• The reduction in total demand can be achieved through any policy that diminishes one of the components of real Gross Domestic Product (rGDP).

Examples of Demand-side Policies Which Are Likely To Reduce Demand Pull Inflation

• Demand-side strategies prove more efficient in the short run in addressing inflation induced by an increase in total (aggregate) demand.
• However, they exhibit lower efficacy in combating cost-push inflation.
• A challenge associated with contractionary policies is that while they diminish demand-pull inflation, they also decrease output and employment.

Examples of Supply-side Policies Which Are Likely To Reduce Cost Push Inflation

• Supply-side policies, though typically long-term in nature, are highly effective in curbing price levels.
• However, they do not assist in addressing inflation resulting from demand-side factors.

Policies To Tackle Deflation

• Deflation triggered by a decline in total demand (e.g., during a recession) is effectively tackled through expansionary demand-side policies.
• Expansionary fiscal policy and expansionary monetary policy are geared towards amplifying total (aggregate) demand within an economy.
  • As total demand rises, general price levels also increase, thereby mitigating or eradicating the deflation.
• Any policy that augments one of the components of real Gross Domestic Product (rGDP) can bolster total demand.

Examples of Demand-side Policies Which Are Likely To Reduce Deflation

• Demand-side policies can prove highly effective in addressing deflationary pressures.
• Expansionary monetary policy often exacerbates income inequality, as the poorest households typically do not benefit from it, given that banks may not necessarily extend loans to them.