Question

What is the goal of controlling inflation & deflation?

Answer 1

• Inflation leads to rise in prices which means the currency with in the economy is worth less than it was before. It leads to exchange rate weakens when compared to other currencies.

So, the goal of the inflation is to reduce the money supply with in an economy by increasing interest rates. This helps reduce spending because when there is less money available in the economy, then people will save more instead of spending.

• Deflation leads to fall in the prices with in an economy. During the period of deflation, people choose to hold money rather spending.
  • So, government play a significant role and the goal of deflation include:

Government start buying securities in open market which leads to create money circulation in the economy. This leads to increase in the money supply and people will spend more. If the supply of money increase in the economy, then it should become less expensive which means value of Money is decreasing.

So, the ultimate goal of controlling the inflation and deflation is to maintain the money supply balance with in the economy.