Tuesday, July 14, 2009

How we can solve inflation

There is no doubt that inflation is disadvantageous to development. At some stage in times of inflation, both consumers and firms are adversely affected. In fact, inflation can absolutely cause an expansion in the poverty incidence of a nation and indirectly cause elevated unemployment rates. There are several proposed methods in order to solve the dilemma of inflation. Basically, these solutions require government intervention. Finished are the days when the prices and the tide of the economy is left to the market forces. This analysis, which is advocated by Adam Smith, is no longer applicable to the contemporary setting especially with the advent of increasing globalization between countries. The role of the State according to Adam Smith is thought to be confined into three functions. The number one function is that it must defend a nation against attacks. The next function is that it should create an administration of justice. The third function is that it ought to provide for collective benefit projects. All of these three functions are still important and pertinent these days but certain functions have to be added in order for the state to become effective. This is especially true in the situation of inflation, which can be solved through government intervention.

To solve inflation, governments have different tools at their disposal.. The government can control the reassignment of foreign currency reserves. The government can impose restrictions on the shift of foreign currency reserves outside of the country. This will reduce inflation since the depletion and reduction of the foreign currency capital will be prevented. An additional act that the government can figure out to solve the challenge of inflation is to rescind particular import controls. By lifting import controls, a nation is able to augment the supply of particular products and services since more foreign products will be able to enter the domestic marketplace of a country. This will result in the balancing of supply and demand.

The government plays a substantial role in the development of the economy and in the fight versus inflation. Therefore, it is imperative to allow the government to achieve regulatory acts that will prevent or eliminate inflation.