Measures to control inflationary gap are –
Excess demand results is in inflationary gap which causes a rise in the price level or inflation ; the value of money will fall. To control this situation ; we can take the following steps –
Fiscal measures –
a) reducing the govt. expenditure.
b) increasing the rate and base of taxes.
Monetary Measures –
a) increase the rate of interest.
b) increase the reserve ratio.
c) increase the bank rate.
d) increase the selling of securities in the open market.
e) strict directions are to be given to the banks by the RBI not to advance loans.
