Instead of asking about how to control deflation? Just go and explore in internet world, you will have a lot ways to control deflation. It is clear that deflation reduces the general price level which is due to decrease in output and employment. It is a set back to the rate of economic growth in the country. The government must take steps to correct the adverse situation.
How to Control Deflation
Where there is a lot of root causes of deflation, here there is also a lot of ways to control deflation and below are few of them. I’m sure after reading this article, you will never ask someone how to control deflation.
- Currency Expansion
Deflation can be controlled though currency expansion. The central bank can issue new notes to increase the supply of currency in the country. The new money is injected into the economy. The people get more income. They spend more on goods and services. The demand increases, which raises the level of production. In this way deflation is driven out of the economy and the rate of growth can maintained.
- Credit Expansion
Credit expansion is a method to control deflation. The central bank can ask commercial banks to expand the volume of credit in the country. The rate of interest is lowered. The business activities go up and the period of deflation comes to an end.
- Low Bank Rate
Deflation may be controlled by lowering the bank rate. The central bank can lower the bank rate to provide more funds to commercial banks. The lower bank rate is an indication for the banks that there is less money supply in the economy. In order to meet the business requirements the banks provide more loans. In case of need, they can get money from the central bank. The low bank rate helps to combat deflation.
- Low Reserve Ratio
The low reserve ratio is a tool to control the deflation. As per law commercial banks are bound to deposit 5 % of their demand and time deposits with the central bank. The decrease in reserve ratio encourages commercial banks to provide more loans. When there is shortage of funds, the banks can borrow from central bank. The increasing rate of loan is another step to kill the evil forces of deflation.
- Consumer Credit
Deflation is controllable by means of consumer credit. The loans must be provided to consumers for the purchase of household assets. Te number of installments can be increased to provide relief to the borrowers. In this way more money remains in the business. The additional money helps the people to expand business activities. The consumer’s credit is one of the methods to eradicate the germs of deflation.
- Tax Decrease
Deflation can be controlled though tax decrease. The rate of tax may be reduced and that personal income may increase. The saved amount can be used for purchase of goods and services. The demand for goods goes up. The businessmen try to raise the level of production. The market forces work for improving the rate of economic growth.
- Public Debt Payment
The government can repay public debt as a tool to control deflation. The debt can be returned by the government in order to increase the supply of money. The amount can be used for other purposes. The business persons can obtain more loans than before. The liberal loan policy at concessional rates is helpful for the business. The banks are able to earn income. In this way deflation is negated.
- Public Works
The government can start public works programmed to eliminate the deflation. The construction of roads, dams, bridges, hospitals, schools and power projects is possible. The amount is transferred from government to general public. The incomes of people go up. The demand for goods increases and there is improvement in production. The public works programmed is another way to eliminate the deflation.
- New Investment
Deflation can be controlled though new investment. The investment can be used to setup new factors and mills. The money is transferred from idle hands to productive hands. The production and employment increase due to new investment. The flow of money from idle hands to productive hands raises the level of growth. The economy moves in the right direction for the welfare of the people by overcoming deflation.
- Production Control
The control over production can help to control deflation. The producers can fix production quota for each. The control over supply is necessary to maintain the price level. The association of producers may be asked to take steps for reasonable and quality output. The demand can be noted and supply must be released to the market. This method is also one of the ways to control deflation.