The economy in California - Essay Example

Instruction: Task: Macroeconomics as a subtopic of mainstream economics is composed of diverse s. An example of these is inflation, which has numerous and diverse effects on the economy. In order to understand such effects analytically, this paper is going to discuss the various implications that inflation poses for the economy, with focus on the positive, and, more importantly, the negative outcomes of inflation to an economy. The Economy in California. INTRODUCTION. Economics as a study thrives to assess the various factors that affect the fiscal and monetary conditions of a nation or a given setting. In the course of this assessment and analysis, various factors are considered in light of their effects and implications on the economy. These factors are divided according to their level of influence and their scope in regards to how each individual entity can deal with them (Melvin & Boyes, 122). As such, economics as a social science incorporates aspects of creation, circulation and utilization of commodities and services within an economy and the various factors that affect this cycle. For a proper and more insightful analysis of these factors, the concepts of micro and macroeconomics are introduced to deal with varying perspectives of the way in which various dynamics impact on the economy. Microeconomics often deals with aspects that are within a given economic entity’s scope, and refers to factors that the entity has control over. On the other hand, macroeconomics lays emphasis on factors that an economic entity has little or no control over, especially factors that have a national, transnational or global scope. An example of a factor that affects the economy on a national perspective is the inflation rate, or the level of inflation within the economy. As such, the analysis of this factor forms an insightful upshot from which the impact of macroeconomic factors can be viewed in relation to the economy. BODY: On a general platform, inflation can be described as the gradual increase in the prices of commodities and service provision within an economy over a given period. This is occasioned by the value of the currency dropping, whereby the financial might of a unit of currency drops and it is able to purchase lesser and lesser items as the level of inflation increases. On other platforms, inflation refers to an average increase in the money circulating within an economy, as occasioned by the value of the currency dropping warranting the need for more legal tender to complete a transaction (Melvin & Boyes, 134). Inflation is caused by a number of factors, ranging from government expenditure exceeding the revenues, or the private sector causing shortfalls in output resulting in demand exceeding the supply of goods and services. Moreover, increased production costs also result in increased prices of goods thereby resulting in inflation. The measure for inflation is carried out through the price index that monitors the overall pricing of consumer goods and services over a given period. The general percentage change in price roughly implicates the inflation level within the economy. The impacts of inflation can be both positive and negative in some instances. However, its negative force is more impacting than the positive effects (McEachern, 187). There are levels of inflation, with low levels of inflation generally considered not as harmful. However, zero and high inflation are considered harmful to any economy. The major impact of inflation is that it creates a financial shortage for individuals who are surviving on a fixed income. This is occasioned by the lack of income dynamism in relation to the rate of inflation (McEachern, 222). The amount of disposable income for such individuals decreases, thereby leading to less expenditure, further enhancing the inflation rate. This results in minimized savings, as more money is used in purchases that were previously less straining on the financial muscle. However, inflation can also result in hidden tax raises especially in the event that persons are subjected to inflated salaries. This is occasioned by the transition to a different tax bracket in relation to the new wage level. If the tax bracket is not considered in light of the pre-existing inflation rate, it could result in the imposition of hidden tax increments on the people (Melvin & Boyes, 234). Furthermore, high inflation rates have an effect of altering the behavior of consumers, as they tend to purchase more in fear of further inflation. This leads to unprecedented shortages within the markets that could easily jeopardize the economy. On the other hand, unscrupulous retailers could easily hoard commodities in anticipation of further inflation in a bid to gain more from the increase in the prices of the commodities. In addition, high inflation rates cause a lack of confidence among the business sectors of the economy, and this leads to reduced investments that hinder economic growth (McEachern, 199). This is occasioned by the business entities losing faith in the economy hence watering down their investments and savings, and this prevents them from further investment activities. This results in companies avoiding long-term plans and minimizing their budgets as the operating environment becomes unfavorable. Given that inflation heralds the onset of tough times for consumers, trade unions and welfare societies may advocate for more salaries and wages for the human resources they cover. This presents a challenge for the employers, as their acceptance for compliance with the trade unionist demands results in them increasing further their product prices thereby the net effect of the increased wages of the workforce remains null. In fact, this only aggravates the inflation problem further in their bid to conform to the trade unionist demands. Moreover, in the event that the trade unionist demands are not met, there is always the risk of riots and revolutions that could rock the economy through the resultant unrest. Indeed, most revolutions and industrial unrests have been known to have grounding on inflationary effects biting on the economy. In addition, inflation negatively affects the equity markets as the value of stocks depreciates for companies that may not replicate the effects of the inflation to the consumers through corresponding increases in the pricing of their commodities. As the value of stocks go down, the overall returns to the investor also decreases thereby discouraging investments in that company. To curb this, companies continually increase the prices of their goods parallel to the rate of inflation to maintain the value of their stocks and hence maintain investments and faith in them. The net result is that this further aggravates the problem of inflation (Melvin & Boyes 342). Moreover, inflation impacts negatively on the balance of payments as the rate at which the domestic currency is depreciating is different from that in the foreign scene. Therefore, the local currency exhibits a low purchasing power in relation to the international markets. This results in exports holding up against imports, hence unfavorable balance of payments for a given economy. The above impacts are for moderate levels of inflation, though there are occurrences of very high levels of inflation known as hyperinflation. This generally occurs when the rate of inflation exceeds the hundred percent mark, though in some instances, this rate goes well past this mark. In such occasions of hyperinflation, the prices of commodities rapidly increase over a very short period and in most cases doubles or trebles after only a short period. The occurrence of hyperinflation is in the event that the initial causes of inflation are not mitigated, and the rate of inflation thus increases to such magnanimous levels (Hart, 56). Other aspects of inflation include stagflation, which refers to a combination of most macroeconomic facets such as slow economic growth and high unemployment levels to create an unfavorable economic state. Apart from the above, low or moderate levels of inflation have some positive implications on the economy. A low or moderate level of inflation is favored as it lessens the harshness of recessions. This is through enabling a quick and steady adjustment by the industry markets in relation to the initial inflationary effects thereby leading to economic stabilization. Furthermore, there is the Tobin effect, which idealizes a moderate level of inflation as a trigger for investments thereby leading to steady economic growth and an increase in state income level. This is due to a decrease in fiscal assets in relation to factual assets such tangible capital. In order to curb inflation, investors manage between holding assets in liquid form to physical capital thus effectively maneuvering through inflationary effects (Hart, 67). CONCLUSION: Most economies are based on the value of the currency in which they are based. Therefore, any impact on the value of the currency is passed onto the industry players of the given economy. In order to control the monetary and economic implications of such occurrences as inflation, such authorities as banks formulate control measures through which the various factors that implicate inflation can be looked into and curbed (McEachern, 332). This is done through such measures as interest rate moderations in relation to prevailing economic conditions apart engaging in open market operations. Furthermore, such authorities as central banks can control inflation through such measures as regulating the amount of money circulating in the economy and setting up banking reserve conditions that guide how such aspects as loans and the operating environment for other banking institutions. Despite this, more research should be carried to determine how central banks can further influence inflation in form of finding ways of minimizing it or reducing its effects. Each society is influenced by the various factors that influence their economy (McEachern, 267). These factors vary with each society depicting its own inherent factors that affect the economy. On the other hand, such macroeconomic aspects as the inflation levels have an impact across all sectors of the economy. Despite having some subtle hints of positive impacts, the majority is negative and can easily annihilate an economy if left unchecked. Works Cited. Melvin, Michael & Boyes, William. Macroeconomics. Malden, MA: Cengage Learning, 2012. Print. McEachern, William. Macroeconomics: A Contemporary Introduction. Malden, MA: Cengage Learning, 2011. Print. Hart, Joyce. How Inflation Works. New York, NY: The Rosen Publishing Group, 2009. Print. Read More