Which of the following is a monetary measure to control inflation in an economy?
-
- Increase in money supply
- Demonetization of currency
- Increase in government expenditure
- All of the above
Correct Answer: Demonetization of currency
Answer Explanation
Demonetization of currency is indeed a monetary measure that can be used to control inflation. As a result of demonetization of currency, certain denominations of currency are removed from circulation and replaced with new ones. This action impacts the money supply and can affect inflation in the following ways:
Reducing Money supply:
Demonetization reduces the overall supply of money in circulation, especially if high-denomination notes are demonetized. When there is less money in circulation, businesses and consumers have less purchasing power, which can moderate inflation driven by demand.
Curbing Black Money and Unaccounted Wealth:
Demonetization is intended to bring unaccounted wealth into the formal financial system and reduce the availability of illicit funds that can lead to inflation and excessive demand.
Promoting Digital Transactions:
Demonetization often leads to a shift from physical cash to digital transactions. As a result, transactions will be more transparent, and tax evasion and money laundering will be less likely, which may lead to inflation.
Why the other options are not correct
a. Increase in Money Supply:
When the money supply is increased through measures such as lowering reserve requirements or engaging in open market operations, inflation can be raised rather than controlled. As a result of excessive spending, a significant increase in money supply can exacerbate demand-pull inflation.
c. Increase in Government Expenditures:
Increases in government expenditures may stimulate economic activity and growth, but they may not necessarily be effective for controlling inflation. A higher government budget can increase aggregate demand, resulting in demand-pull inflation.
d. All of the above:
Although all of these options (an increase in the money supply, an increase in government expenditures) can influence an economy’s overall performance, they do not constitute effective monetary measures to control inflation on their own. As a result, inflationary pressures may even be exacerbated rather than alleviated in some cases.
Conclusion
In conclusion, demonetization of currency represents a monetary measure that can be employed to control inflation. By reducing unaccounted wealth, increasing the money supply, and promoting digital transactions, this strategy can moderate inflationary pressures. Increasing the money supply and government expenditures play a role in economic management, but they do not specifically target inflation control.
In order to achieve their desired inflation and economic goals, policymakers must carefully consider the appropriate mix of monetary and fiscal measures.
Demand- Pull inflation is caused by an
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.
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