how to control deflation

Control of Deflation

• Reduction in Taxation: The government should reduce the amount and burden of various taxes levied on commodities. This will increase the purchasing power of the people. As a result, the demand for goods and services will increase. Moreover, sufficient tax relief should be given to businessmen to encourage investment.
• Redistribution of Income: Marginal propensity to consume can be raised by a redistribution of income and wealth from the rich to the poor. Since the marginal propensity to consume of the poor is high and that of the rich is low, such a measure will help in increasing the aggregate demand in the economy.
• Deficit Financing: In order to have significant expansionary effects, the government’s public works schemes should be financed by the method of deficit financing. The government should adopt a budgetary deficit (excess of government expenditure over its revenue) and cover this deficit through deficit financing. Deficit financing makes sufficient resources for developmental programmes available to the government without adversely affecting investment in the private sector.
• Reduction in Interest Rate: By adopting a cheap money policy, the monetary authority of a country reduces the interest rate which stimulates investment and thereby, expands economic activity.
• Foreign Trade Policy: To control deflation, the government should adopt such a foreign trade policy that, on one hand, increases exports and, on the other hand, reduces imports. This kind of policy will go a long way in solving the problem of overproduction and help in overcoming deflation.