Q. Which of the following is/are measure/measures to control rising inflation?
1.The government may go for import of goods.
2.The government may try cutting down the production cost of goods.
3.The government may take recourse to tighter monetary policy.
Choose the correct answer from below given codes:

[A] 1 only

[B] 1 and 2 only

[C] 2 and 3 only

[D] 1, 2 and 3

Answer: D
Notes:

Explanation: The governments resort to the following options to check rising inflation:

  1. As a supply side measure, the government may go for import of goods which are in short-supply—as a short-term measure (as happened in India in the case of ‘onion’ and meeting the buffer stock norm of wheat). As a long-term measure, governments go on to increase the production to matching the level of demand. Storage, transportation, distribution, hoarding are the other aspects of price management of this category.
  2. As a cost side measure, governments may try to cool down the price by cutting down the production cost of goods showing price rise with the help of tax breaks—cuts in the excise and custom duties (as happened in June 2003 in India in the case of crude oil and steel). This helps as a short-term measure. In the long-term, better production process, technological innovations etc., are helpful. Increasing income of the people is the monetary measure to avoid the heat of such inflation.
  3. The governments may take recourse to tighter monetary policy to cool down either the demand-pull or the cost-push inflations. This is basically intended to cut down the money supply in the economy by siphoning out the extra money (as RBI increases the Cash Reserve Ratio of banks in India) from the economy and by making money costlier (as RBI increases the Bank Rate or Repo Rate in India). This is a short-term measure. In the long-run, the best way is to increase production with the help of the best production practices.

Source: TMH Ramesh Singh