Question

What ways are there to avoid an increase in inflation and bring the economy to full employment rapidly?

Answer 1

Discussion about controlling inflation and reaching the state of "full employment" has been around economic tables every time. As such, there are several ways prescribed by many economists. Examples:
Inflation
When aggregate demand tends to increase sharply due to rise in consumption expenditure or rise in government expenditure way beyond aggregate supply ( demand pull inflation) or there are cases when aggregate demand may not even rise and still the prices threaten to rise due to increase in cost of production( cost push inflation). It threatens to put inflationary pressures in the economy. The measures to deal with either type of inflation are more or less same.

Tight Monetary Policy
To check inflation, tight or restrictive monetary policy could be used. Some of the measures are as follows:
Open Market Operations- The government engage in the sale of its securities to the commercial banks, public and other institutions which in turn reduces the reserves of the banks, liquidity with the public. Thus, it results in reduction in credit creation and liquidity in the economy.
Reducing the bank rate: This is another way to restrict liquidity to the banks and public. By increasing the bank rate, the central bank restricts the scope of investment spending and thus avoid inflation to increase.
Cash Reserve ratio: One important anti-inflationary measure is to increase Cash reserve ratio (CRR) and thus somewhat restrict lending capacity of the commercial banks.


Fiscal policy and inflation
Fiscal policy can be used to avoid the problem of inflationary pressures in the economy. While economists argue on the strength of monetary policy to avoid inflation and reach full employment, others cite fiscal policy as a more suitable way to address the issue. Fiscal measures are as follows:
Reducing Government expenditure: It includes dampening government expenditure to reduce aggregate spending in the economy to bring it at par with the productive capacity of the economy.
Increasing Taxes: This measures is considered a strong measure to restrict aggregate activity in the economy.
Reducing Budget deficit: One of the way to avoid increase in prices is also to reduce budget deficit.