When aggregate demand for goods and services exceeds aggregate supply of output which is produced by fully employment the given resources of an economy, excess demand is said to occur. This excess demand leads to the rise in general price level, that is, inflation in the economy. When aggregate demand exceeds aggregate supply at the current prices at full employment level, the demand inflation is, said to exist.
Excess demand results in inflation which is described as demand-pull inflation. At the full employment level, all the productive resources are fully exhausted. Any increase in demand can not bring about rise in real output. The real output remains constant whatever the demand may be. ...view middle of the document...
Generally public borrowing is voluntary; voluntary public borrowing may not fetch sufficient purchasing power to the Govt, so that inflationary pressure will be arrested. The fore Govt will resort to compulsory public borrowing. Through compulsory public borrowing part of the wage or salaries is compulsorily deducted which become redeemable after a few year.
(4) Control of deficit financing:
Financing, the deficit budget through printing of new notes is known as deficit financing. The Govt should minimize deficit financing. The deficit shoed is financed through saving or taxation. The Govt can sell bonds to non-bank investors, like insurance companies, and takes away the spending power from the public and hence inflation is curbed.
(5) Over valuation:
A over valuation of domestic currency in terms of foreign currencies will also serve as an anti-inflationary measure. Firstly it will discourage exports and thereby increase the availability of goods in the domestic market. Secondly by encouraging imports from abroad it will add to the domestic supply of goods in the economy. But over valuation as an anti inflationary weapon suffers from several limitations, (ii) Monetary measures:
(1) Increased Re-discount rates:An increase in bank rate tends to discourage borrowing by business from banks; and thereby lessening the pressure of inflation in the economy. An increase in the interest rate due to increase in the bank rate will make savings attractive than before and induce people to spend less on consumer goods.
(2) Sale of Govt, security in the open...