How Do Interest Rates Influence the Rate of Inflation
Productivity gains help to control unit labour costs, which are an important cause of cost-push inflation, and so put less pressure on producers to raise their prices. Supply side policies designed to improve productivity may include education and training schemes.
Supply side policies are therefore an important way of controlling inflation, but they are, like fiscal policy, used in conjunction with monetary policy. Supply-side policies on their own are unlikely to keep inflation at bay. However, they have resulted in a 'New Paradigm' where economic growth and low inflation seem to be able to co-exist in the economy.
Monetary policy is therefore an important tool in controlling inflation. Other policies are also used, however, such as fiscal policy and supply side policies, but these on their own are usually problematic, often giving rise to policy conflicts. Supply side policies are important ongoing measures which help to reduce the price level, particularly through controlling cost-push inflation. Monetary policy, however, is currently the main method of controlling demand-pull inflation.
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