1. Fiscal policy - This policy is based on demand management in terms of either raising or lowering the level of aggregate demand. The government could attempt to influence many of the components [C + I + G + (X – M)] of the aggregate demand by reducing government expenditure and raising taxes. This policy is effective only against demand - pull inflation.
2. Monetary policy - For many years monetary policy was seen as only supplementary to fiscal policy. Neo-keysians content that monetary policy works through the rate of interest while monetarists? viewpoint is to control money supply through setting targets for monetary growth. This can be achieved through what is known as the Medium term financial strategy (MTFs) which aims at gradually reducing the growth of money in line with the growth of real economy - the use of monetary policy instruments such as the bank rate, open market operations (omo), variable reserve requirement (cash & liquidity ratios)
3. Direct Intervention (prices and incomes policy) – Direct intervention involves fixing wages and prices to ensure there is almost equal rise in wages and other incomes alongside the improvement in economic productivity. Nevertheless, these policies become successful for a short period as they end up storing more trouble in future, since once relaxed will lead to frequent price increases and wage fluctuation. Like direct intervention, fiscal and monetary policies may fail if it is relied upon as the only means of controlling inflation, and that what is needed is an element of policy combination.
Wilfykil answered the question on February 7, 2019 at 07:10
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