It may be one of the most familiar words in economics. Inflation has plunged countries into long periods of instability. Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year. Inflation is usually defined as a wide measure of price increases or increases in the cost of living in a country. It may, however, be estimated more precisely for specific products, such as food, or for services, such as a haircut. A contractionary monetary policy is a common technique of managing inflation. The objective of a contractionary policy is to limit the money supply inside an economy through reducing bond prices and increasing interest rates. This helps to limit spending because when money is scarce, people who have it choose to keep it and save it rather than spend it. Reducing spending is important during inflation because it helps halt economic growth and, in turn, the rate of inflation.

Malavika Menon

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