At the time of inflation, contractionary fiscal and monetary policy must be adopted by the government. Through fiscal policy, government should increase taxation, remove unnecessary expenditure to reduce the Aggregate Demand. But such increase in taxation should not be abnormal, otherwise there will be an adverse effect on Investment and Production. Government may promote compulsory savings scheme.

Government should frame the surplus budget and repayment of public debt should stopped. In this way, rigid monetary policy may be adopted. To check rising prices due to the excess demand, central bank may resort to increase in the bank rate, sale of securities in open market and increase in Reserve Ratio. Along with it, Selective Credit Control measures like increase in the margin of credit may also be adopted. It also tries to control consumers’ credit. Along with all these methods, demonetisation may also be adopted. In this way, at the time of deficient and excess demand, through appropriate measures of monetary and fiscal policy, this problem can be solved.