Posted in Finance, Accounting and Economics Terms, Total Reads: 121
Reflation is a strategy adopted by the government of a country to counter the effects of deflation. This can be achieved by pumping in more money into the system and there is tax reduction, to increase liquidity in the economy.
Output and price level have direct effect on the economy. In case the price level is more that the level of output that is a case of inflation and in case the price level is going below the corresponding level of output that is a case of deflation. Excess of both, inflation and deflation is considered bad for the economy and every economy undergo through inflation or deflation.
Reflation is related to deflation. So in order to understand reflation we will look deeper into deflation. In case the general price level is falling continuously because of increase in the supply but lack of demand. In case there is lack of demand this means that this will lead to increase in unemployment as there will be less need of output and the firms will already have excess of output. Hence high unemployment, less level of income and low level of output. This is not good for the economy as the economy is not growing.
In order to counter deflation various monetary and fiscal measures are undertaken by the government and the central bank to stimulate the economy. Stimulating the economy will increase either the investment funding with the general public or income in the hand of the people by providing more employment opportunities. This will directly affect the aggregate demand and lead to increase in the general price level
MONETARY POLICY MEASURE
The central bank reduces the interest rate at which lends to the general public which will further reduce the rate at which the commercial banks will lend money. Hence there will be more borrowing and more investment which will lead to increase in the employment and hence more income and more demand.
FISCAL POLICY MEASURE
Government may reduce the tax rate of do more public spending. In case they reduce the tax rate which means that the public will have more money to spend and in case more public spending then again more employment, both cases will eventually lead to increase in aggregate demand.