Rising inflation directly doesn't lead to increase in india's GDP, Rather it leads too increase in nominal GDP of the country which is calculated at current year prices of final goods and services, that neans inflation leads to increase in nominal GDP even if the productivity of the country is stagnRead more
Rising inflation directly doesn’t lead to increase in india’s GDP,
Rather it leads too increase in nominal GDP of the country which is calculated at current year prices of final goods and services, that neans inflation leads to increase in nominal GDP even if the productivity of the country is stagnent
Which makes Nominal GDP of a country as an illusionary indicator of growth in an economy while real indicator is increase in Real GDP which is calculated at base year prices (unaffected by inflation)
Infact sometimes Increase in Nominal GDP of a country results in negetive growth in following ways
1. Increase in cost of production
As a result of increase in general price levels producers would face increase in cost of production, This leads to lower profit margins which makes the producers difficult to survive
2 Lower consumer spending in long term
Rise in general price levels leads to decrease in purchasing power of consumer if income doesn’t increase proportionately, as a result consumer tends to reduce the consumption
3. Rise in interest rates
To curb the inflation RBI mmay increase the interest rates, so that it makes costly to consumer to borrow and it tends to lower the consumer spending
4. Economic unstability
Inflation leads to uncertainty in economy which makes it difficult to make decisions for consumers as well as producers which results in. Economic unstability
GOVERNMENT can take necessary steps to curb the inflation through fiscal policy so as to reduce uncertainty in market by
• Increasing taxes on income to reduce the purchasing power of consumers
• decresing govt spending or investments
• borrowing more from public to reduce the money supply in markets
Through monitery policy by
• increase in repo rates or reverse repo rates
• controlling open market operations
• increasing interest rates etc
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To control inflation, the Reserve Bank of India (RBI) can implement several key measures: Increase Interest Rates: Repo Rate: Raising the repo rate makes borrowing more expensive for commercial banks, leading to higher interest rates for consumers and businesses. This reduces spending and investmentRead more
To control inflation, the Reserve Bank of India (RBI) can implement several key measures:
- Increase Interest Rates:
- Repo Rate: Raising the repo rate makes borrowing more expensive for commercial banks, leading to higher interest rates for consumers and businesses. This reduces spending and investment, thereby cooling demand and controlling inflation.
- Reverse Repo Rate: Increasing the reverse repo rate encourages banks to deposit more funds with the RBI, reducing the money supply.
- Open Market Operations (OMO):
- The RBI can sell government securities in the open market to reduce the money supply. When buyers purchase these securities, they pay the RBI, effectively reducing the amount of money circulating in the economy.
- Cash Reserve Ratio (CRR):
- By raising the CRR, the proportion of deposits that banks must hold as reserves, the RBI reduces the funds available for banks to lend and invest, thereby decreasing the money supply.
- Statutory Liquidity Ratio (SLR):
- Increasing the SLR, the minimum percentage of deposits that banks must invest in safe and liquid assets, reduces the amount of money available for lending, helping to control inflation.
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