- Direct controls
- Direct controls are rules that let a government set or limit prices, wages, imports or flows of money itself, rather than steering them through total spending.
- Demand management
- Demand management is the use of fiscal and monetary policy to change total spending, so that prices, output and imports respond indirectly.
The four direct controls
Can you name the four kinds of direct control a government can use?
Each one targets a macro problem head on.
Price controls are laws that regulate prices, usually a legal maximum that stops the price of a good or service rising above a set level.
Can you think of an example?
To hold down inflation, a government freezes the prices of bread, fuel and rents, so sellers may not charge more than they did last month.
Wage controls are legal limits on pay, usually a cap on how far employers may raise wages in a year.
Can you think of an example?
A government rules that no employer may raise pay by more than 3 per cent this year, to stop rising wages pushing up prices.
Import controls limit the quantity of goods a country buys from abroad, through an import quota or rules that make importing harder.
Can you think of an example?
A country with a large current account deficit limits car imports to a fixed number a year, so more spending goes on cars made at home.
Capital controls are taxes or regulations that limit flows of financial capital into or out of a country.
Can you think of an example?
Facing a run on its currency, a government stops residents moving more than a fixed sum abroad each month, to slow the fall in its exchange rate.