Escolar Documentos
Profissional Documentos
Cultura Documentos
1. Monetary Policy
In the UK and US, monetary policy is the most important tool for maintaining low inflation. In the UK, monetary policy is set by the MPC of the Bank of England. They are given an inflation target by the government. This inflation target is 2%+/-1 and the MPC use interest rates to try and achieve this target. The first step is for the MPC to try and predict future inflation. They look at various economic statistics and try to decide whether the economy is overheating. If inflation is forecast to increase above the target, the MPC will increase interest rates. Increased interest rates will help reduce the growth of Aggregate Demand in the economy. The slower growth will then lead to lower inflation. Higher interest rates reduce consumer spending because:
Increased interest rates increase the cost of borrowing, discouraging consumers from borrowing and spending. Increased interest rates make it more attractive to save money Increased interest rates reduce the disposable income of those with mortgages. Higher interest rates increased the value of the exchange rate leading to lower exports and more imports.
Base interest rates were increased in the late 1980s / 1990 to try and control the rise in inflation.
viii. Deregulate financial markets to allow more competition and lower borrowing costs for consumers and firms. ix. Lower Tariff barriers This will increase trade x. Removing unnecessary red tape and bureaucracy which add to a firms costs xi. Improving Transport and infrastructure. Due to market failure this is likely to need government intervention to improve transport and reduce congestion. This will help reduce firms costs. xii. Deregulate Labour Markets This is said to be an important objective for the EU to increase competitiveness. E.g. make it easier to hire and fire workers.
3. Fiscal Policy
This is another demand side policy, similar in effect to Monetary Policy. Fiscal policy involves the government changing tax and spending levels in order to influence the level of Aggregate Demand. To reduce inflationary pressures the government can increase tax and reduce government spending.
5. Wage Control
Wage growth is a key factor in determining inflation. If wages increase quickly it will cause high inflation. In the 1970s, there was a brief attempt at wage controls which tried to limit wage growth. However, it was effectively dropped because it was difficult to widely enforce.