Page 207 - DECO402_Macro Economics

Macroeconomic Theory

Notes 3. Other Measures
For opposing inflation, for completing monetary and fiscal measures other non-monetary measures
must be adopted.
a. Price controlling and Rationing: It is a useful popular direct measure of controlling price
rise. Meaning of price control is to establish a legal maximum price, beyond which prices of
special things are not allowed to rise. On the other side job of rationing is distribution of goods
of short supply in a justified manner, for creating conditions supportive in price stability.
Price control and rationing generally go side by side. But applying such anti inflationary
measures is difficult. Because of unskilled and corrupt management, this control may induce
black marketing of things kept under control. Apart from this, due to the practical difficulty
of arranging distribution of necessary consumer goods in sufficient number under rationing
system, utility of rationing is limited. This measure also limits the freedom and well being
of the consumers.
During war, price control is possibly the most impactful measure, when other measures
to control inflation go wasted. During the Second World War, many countries adopted
price control and continued it after the war! During this war, due to intense inflation, many
necessities went beyond the reach of weaker sections of the economy. Because of the hope of
further increase in their prices, traders stocked these goods. Only price control can provide
relief to the victims of inflation.
b. Wage Policy: High wages induce high cost and at the end high price, as a result (of which)
cost push inflation is created. It is suggested that wages, salaries and profit amount should
not be controlled through income freezing. wage freezing is supported by the traders. They
do not support any such measure that influences their profits.

22.6 Summary

y Keynes connected the concept of inflation with the incident of full employment. Like Pigou,
Keynes has related inflation with the condition of increase of price level, which comes in
existence after the situation of full employment. As per him, relation of inflation is with that
increase in price level which happens after achieving the level of full employment. In this
situation of price rise, production will not increase.

22.7 Keywords

y Precise—Particular.
y Inversely—in reverse.
y Reflation—Partial inflation.

22.8 Review Questions
1. What is meant by inflation? Clarify.
2. How many types of inflation are there? Explain.
3. What do you understand by inflationary gap?
4. Comment on “control of inflation”.

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