Which one of the following is a measure that can be used by the Government for combatting inflation?

To combat inflation, the government and central bank aim to reduce the money supply and aggregate demand. Increasing the rate of interest on savings and fixed deposits encourages households to save more rather than spend, thereby reducing disposable income and aggregate demand [1]. This is a key component of contractionary policy, as higher interest rates make saving more attractive and borrowing more expensive. Conversely, increasing non-planned expenditure on defense or police would increase government spending, which typically fuels demand-pull inflation [1]. Providing export subsidies increases the money flow into the economy and can exacerbate inflation. Finally, a reduction in the Cash Reserve Ratio (CRR) increases the liquidity available for banks to lend, which expands the money supply and would likely increase inflation rather than combat it.

Sources

1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > CHAPTER SUMMARY > p. 77