How does the government control inflation through monetary policy?

Fsp Invest, 10 Dec. 2013

Tags: inflation, monetary policy, economy, tight monetary policy, how government controls inflation

One of the things that gets investors in a flap is a high level of inflation in the economy.
High inflation is really bad news for your money.
Because high inflation decreases the purchasing power of your money!
So the same amount of money today buys you less than it bought you last year.
If inflation happens too rapidly, things can quickly spiral out of control in the economy.
Think of the recent incident of hyperinflation in Zimbabwe.
A loaf of bread would have cost you $16 million Zimbabwe dollars in 2008! That’s the scary side of inflation.
But there are powerful tools government can use to protect you.
Here’s how they work.

One of the best ways for government to control inflation and protect your wealth
Luckily for you, the South African government keeps a close eye on inflation. 
One of the ways government tries to stop hyperinflation from happening is through their monetary policy. 
‘Monetary policy’ is a term for the methods government uses to control the supply of money in circulation. 
One of the ways they can do this by changing the interest rate. 
High interest rates will decrease the supply of money in an economy, and lower inflation. 
Doing this will make ‘money tight’, which is why we refer to it as ‘tight monetary policy’. 
So, next time you hear talk of high inflation, listen out for an announcement that monetary policy is tightening. 

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