How To Control Deflation?


3 Answers

Iris Phillips Profile
Iris Phillips answered
To control deflation, steps to increase overall effective demand, equalizing output of goods, income and employment within an economy, have to be taken. In other words, measures to increase consumption, as well as investment expenditure, must be brought into force. Some of the measures possible to achieve such increases are:
  • Reduction of Taxes
    Reducing the taxes levied on certain commodities will result in increasing spending power of the population. Tax relief for businesses will encourage investment.

  • Redistribution of Income
    The marginal tendencies to consume can be raised by redistributing income and thus reducing the gap between rich and poor. This can be achieved by adjusting income tax levels to the levels of income, e.g. High incomes will be taxed higher than low incomes. This will again result in an increase in aggregate demand.

  • Public Debt Repayment
    Old public debts can be repaid by the government during a period of deflation, resulting in increased spending power and effective demand.

  • Business Subsidies
    Government subsidies to businesses will encourage investments.

  • Public Works
    Expenditure within the public sector can be increased through public works schemes. These schemes should, however, serve to supplement, not supplant private investment.

  • Deficit Financing
    Public works schemes can be financed via deficit financing, in other words, printing more money. This means the government adopts a budgetary deficit and covers it through deficit financing. This will supply sufficient resources to the government without having an adverse effect on private sector investments.

  • Interest Rate Reduction
    Reducing interest rates stimulates investments and expands economic activity.

  • Expansion of Credit
    Easily available bank credits encourage investment and promote industry and business in general.

  • Foreign Trade
    Increased exports and decreased imports will reduce over-production and aid in overcoming deflation.

  • Production Regulation
    Production is adjusted to coincide with existing demand in order to avoid  over-production.
Anonymous Profile
Anonymous answered
• Decrease in the money supply
• Increase in the supply of goods
• Fall in the demand for goods
• Escalation in the demand for money
Muhammad Abdullah786 Profile
The process of deflation is just the opposite of inflationary process. Deflationary process comes into existence when the level of money income falls relatively to the current supply of goods and services. Deflationary process may occur due to a fall in the investment or persistent unfavorable balance of payments or a continued government budgetary surpluses or sudden increase in the total output, or by action of the central bank to raise the discount rate or by selling securities or due to the combined effect of all these factors.

Professor Friedman then adviser to President Nixon, is of the view that deflationary spiral takes place when the money supply is held to a rate of growth less than the economy's potential output. Like inflation, deflation can be controlled both by fiscal and monetary measure. The disciples of J.M. Keynes are strongly of the view that prices can be stabilized more by fiscal measure than by monetary steps. They say the task of increasing the demand for goods and services could be done by government by increasing public spending by reducing taxes, by stimulating private investment or private consumption on a combination of all theses. In deflationary period, there are industrial disputes and unrest in the industrial sector.

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