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Discusion: The Bank of Enlgand's M.P.C. Has Allowed the C.P.I. Inflation Rate to Stay above its 2% Target for More than Two Year - Coursework Example

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The Bank of Enlgand's M.P.C. has allowed the C.P.I. inflation rate to stay above its 2% target for more than two years. Discuss the view that deflation is potentially a much worse problem than inflation. Contents Introduction 3 Inflation 3 Deflation 3 Bank of England 3 Main Body 4 Measurement RPI, RPIX, CPI briefly and CPI figure 4 Weighted basket of goods 5 Causes 5 Unanticipated Cost Push and Demand Pull 5 2 short-run diagrams with explanation 6 Benefits of inflation briefly 8 Costs of inflation 8 Compare to costs of deflation 8 Solutions 9 Inflation 9 Deflation 9 Conclusion 10 Reference 11 Introduction Inflation Inflation is defined as the continuous or sustained rise in the general level …
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Discusion: The Bank of Enlgands M.P.C. Has Allowed the C.P.I. Inflation Rate to Stay above its 2% Target for More than Two Year
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Download file to see previous pages 2). Deflation The persistent fall in the average price levels in the economy is defined as deflation. Deflation has been categorized as ‘good’ and ‘bad’ by economists. The former type of deflation arises from improvements in the supply side while the later one arises from the demand side of the economy. Bank of England The new government authorized the bank of England to set the interest rates in 1997. The Bank would act in independent fashion although the target of the inflation was set by the chancellor. The role of price stability in achieving economic stability was soon recognized. Policies to attend targeted inflation rate might cause undesirable volatility in output. A range of inflation rates were set. If the observed rate varied from the lower or upper range by one percentage points, the Bank has to explain the reasons behind such outcome. The proposal of the Bank to drive inflation back on the targeted range should be mentioned in the open letter from the Governor to the Chancellor. But it does not imply that the inflation rate can be anything in the range of 1.0% to 3.0%. The target rate of inflation is 2%. Presently, the Governor has submitted twelve open letters and the Consumer Price Index inflation in all the cases were more than 1% point above the targeted level. The Governor predicted in August, 2011 that inflation will be around 5% in the near future. It is forecasted that inflation will fall in 2012 but the timing or the range of the fall remained unexplained. Main Body Measurement RPI, RPIX, CPI briefly and CPI figure The Office of National Statistics publishes Retail Price Index as a measure of inflation monthly. The RPI of the U.K. is calculated in the following steps. The first step involves selection of a base year around which the price changes can be measured. Then, a list of items required by an average family is drawn up. The relative importance of each item in the family budget is considered with the help of assigned weights. The price of each item listed is multiplied with the assigned weights after adjusting the size of the item according to its importance. The price of each item both in the base and the year under consideration is required. This enables in calculating the percentage change over the desired period of time. PRIX is a measure of inflation which excludes mortgage interest payments. The changes in the price level of goods and services purchased by the households are measured by Consumer Price Index (CPI). The CPI can be calculated as the ratio of updated cost and price of the base period multiplied by 100. For calculating CPI for multiple items the following formula is used: The CPI figure for February, 2012 is 3.4%. Weighted basket of goods The basket of goods refers to the set of consumer products used on yearly basis to catch inflation in a particular market. The goods are weighted by assigning a value to each considering the relative importance in the basket. Causes Some of the causes of inflation are raising costs of imported raw materials, rising costs of labor and high rate of indirect tax imposed by the ...Download file to see next pagesRead More
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