(i) Inflation:-currency is pumped into the economic system by various methods. It has its own characteristic effects on the system. Printed currency is issued against the sovereign bonds with the Central Bank (RBI in case of India). A part of the currency helps the developmental aspects. While a major part produces a heat of the economic system in the form of lowering the worth of money; which in general is called inflation. The direct impact is seen in rising prices of commodities.
Inflation beyond 10% points at a given scale of time and space is believed to be un-healthy sign of an economic system.
Remedial measures of Inflationary aspects of economy:-A sovereign state adopts the following methods to check the rising inflationary tendencies:-
(A) CRR (cash reserve ratio) is increased by the Central Bank. It means that all banks have to maintain a reserve with the Central Bank for issuing the currency.It implies that a bank has to deposit/attach a large chunk of its liquid resources with a central bank.
Effects:-
(i) It results in depletion/lowering of usable liquidity with the banks.
(ii) Industry is deprived off requisite liquidity in the form of loans etc.
(iii) Banks resort to inter-Bank borrowing.
(iv) Less liquidity at the hands of public pulls down the inflation %age.
(v) The %age of growth/development is largely affected owing to less availability of funds.
(B) The Central Bank puts a benchmark on the rates of interest to be charged on the loans, advances by the banks.
Effects:- Similar to above.
In the process of curbing inflation, if symptoms of recession are exhibited by economic system, the State resort to all means opposite to what is discussed above.
(i) CRR ratio is lowered.
It results in high liquidity at the disposal of banks. Industry is in a position to borrow large amount of money.
(ii) Lowering/loosening of interest regime.
It results into a system of cheap money available for the industrial sector. It is comparable to a factor when public lend its resources to financial markets. But the former is highly inflationary while the later is NOT.
Present day recession has compelled the govts to pump huge amount of money into the system by lowering the CRR ratio. eg. India has added 125 billion Rupees in the banking sector., USA has added 700 billion dollars in the financial sector.
International Scenario:-
A scientific approach to curb recession is to put a joint effort by the world financial system, by increasing liquidity in the financial sector so that industry and related developmental agencies get a boost; for increasing the growth and development.Such effort over a long period will recreate the demand and supply equilibrium world-wide. This will vanish the recession altogether.
Flip points:-
World leaders cannot accommodate others on economic issues beyond a particular point due to their intrinsic socio-political constraints. This factor is solely responsible to fire the recession. And it ensures that once recession gets into the economic system, it does not fade away over a small time frame work. In other-words, it takes a span of 5 to 6 yrs for the world economy to recover from a wide spread recession.
written for navu.