Exchange rate policies can be used to control inflation, but their effectiveness varies depending on the economy's structure and external conditions. By influencing the value of the domestic currency against foreign currencies, a country can impact the cost of imports and exports. For instance, if a central bank acts to appreciate its currency, imported goods become cheaper, which can help lower inflation, particularly if the economy is heavily reliant on imports. However, an appreciated currency can hurt export competitiveness, potentially leading to a trade deficit and affecting economic growth. Conversely, devaluing the currency can lead to higher costs for imports, potentially exacerbating inflation, especially in economies dependent on imported goods and raw materials. Exchange rate interventions can also lead to retaliatory actions from trading partners and may not be sustainable in the long run, especially for small, open economies. The effectiveness of these policies also depends on the elasticity of demand for imports and exports and the overall stability of the global economic environment. In summary, while exchange rate policies can influence inflation, they must be used judiciously, considering their broader economic implications and interactions with other economic policies.

Inflation targeting contributes to economic stability by providing a clear and measurable goal for monetary policy. When a central bank publicly commits to an inflation target, it sets expectations for future inflation, influencing the behaviour of consumers, businesses, and investors. This transparency helps reduce uncertainty in the economy, as economic agents have a clearer idea of what to expect regarding inflation and can plan accordingly. Additionally, by focusing on a specific inflation target, central banks can make more consistent and predictable policy decisions, avoiding abrupt shifts that could destabilise the economy. This consistency enhances the credibility of the central bank, making its policies more effective in influencing economic conditions. Moreover, by keeping inflation within a target range, the central bank can help avoid the detrimental effects of both high inflation (such as eroded purchasing power and uncertainty) and deflation (such as reduced consumer spending and investment). Overall, inflation targeting helps maintain price stability, which is a fundamental prerequisite for sustainable economic growth and stability.

Supply-side policies, designed to increase the productive capacity of the economy, can be effective in controlling inflation in the long term but come with potential risks and downsides. Firstly, these policies often require significant time to yield results. Measures like investing in education, infrastructure, and technology take years to improve productivity and increase supply. During this period, inflationary pressures may persist. Secondly, supply-side policies can be costly for the government, requiring substantial public investment or incentives for private investment, which could strain public finances, especially if funded by increased borrowing. Thirdly, the effectiveness of these policies depends heavily on the broader economic context and the responsiveness of businesses and workers. For instance, tax cuts or deregulation intended to stimulate investment and production might not lead to the desired outcomes if businesses are uncertain about future economic conditions. Additionally, deregulation might lead to negative externalities, such as environmental degradation or reduced worker rights, if not carefully managed. Overall, while supply-side policies can address the root causes of cost-push inflation, their success is contingent upon strategic implementation and favourable economic conditions.

Wage and price controls, while effective in immediately curbing inflation, can lead to shortages and black markets due to their distortion of market mechanisms. When the government imposes a cap on prices, it might set them below the market equilibrium price. At this lower price, the quantity demanded for goods and services increases, but the quantity supplied decreases because producers find it less profitable to produce. This mismatch leads to shortages, where the demand for a product exceeds its supply at the controlled price. In response, black markets may emerge, where goods are sold illegally at prices higher than the government-imposed limits. Sellers on these markets can meet the excess demand, albeit at higher prices, effectively undermining the purpose of the controls. Moreover, persistent shortages can lead to reduced product quality, as producers might cut corners to keep costs down. Wage controls can similarly lead to a shortage of labour, particularly skilled labour, as individuals may be less incentivised to work or develop skills for wages that are artificially kept low.

Quantitative easing (QE) can lead to inflation through several mechanisms. Primarily, it involves a central bank purchasing large amounts of financial assets, typically government bonds, to inject liquidity into the economy. This increased money supply can boost spending and investment, potentially leading to higher demand for goods and services. If this heightened demand outpaces the economy's productive capacity, it can result in demand-pull inflation, where too much money chases too few goods. Additionally, QE can devalue the currency, making imports more expensive, contributing to cost-push inflation. While QE aims to stimulate a stagnant economy, careful management is required to avoid creating excessive inflationary pressures. Moreover, if the money created through QE does not circulate effectively in the economy (for example, if banks hoard the extra liquidity or if consumer confidence remains low), the inflationary impact may be limited. However, prolonged or excessive QE can lead to high inflation, especially if not withdrawn or tapered off appropriately as the economy recovers.