Macro & Micro economics: Inflation Introduction Inflation is the state of an economy when the general price level in the economy rises due to the falling value of money. This term involves a wide range of variables and does not have any fixed satisfactory definition…
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Inflation defined in this way refers to monetary inflation, which is the difference between the growth in money supply and the growth in availability of goods and services in the economy (Siegl, 2009). There are various measures of inflation, but most commonly, inflation is measured by using Consumer Price Index (CPI). The CPI refers to price of a basket of commodities and services that an average customer buys and changes in this index allows economists to study the rise and fall of the general price level in the economy which helps them to study the rate of inflation in the economy. In the latter half of 2012, Bank of England Chief Economist, Spencer Dale, had warned that the average standard of living for the Britons would fall in 2013. The country (UK) is still on the recovery phase from the shock of the financial crisis, this process is a slow and painful one. With a high unemployment rate of 7.8% and wage growth struggling to keep up with inflation, 2013 is looking to be another year of hardship. Causes of inflationary pressure Inflation refers to the upwards movement of the general price level in economy. Prices are determined in the free market economy through the interaction of the sellers and the buyers in the economy. Most economists consider that the inflationary pressure in the economy is caused from either the demand side (demand pull inflation) or the supply side (cost push inflation) pressure on the equilibrium condition in the market (P. J. Welch and G. F. Welch, 2009). Demand pull inflation In long run, when the total output in economy moves towards the full employment output, the economy operates nearly at the full capacity. At full capacity, the economy produces the maximum amount of output by utilizing the available factors of production and the production level cannot be expanded easily. Figure 1: Demand Pull inflation (Source: Pettinger, 2013) At the other end, consumers in the economy are themselves the workers and they are earning more since output level is high at this stage. Hence, there is high consumer demand for services and commodities. This demand pressure from households coupled with the near full capacity production by the producers in the economy triggers inflationary pressure in the economy (P. J. Welch and G. F. Welch, 2009). Cost push inflation Inflationary pressure also occurs when cost to sellers of goods and services rise. Any source of cost to businesses is also a source of increase in rise in prices. Cost to producers and sellers are transferred to buyers partially or wholly and they through rise in prices. Figure 2: Demand Pull inflation (Source: P. J. Welch and G. F. Welch, 2009) Upwards pressure is created on prices if costs of labour, fuel, raw materials and other factors of production rise. At times firms’ attempt to enhance profit in certain industries increases prices and creates inflationary pressure (P. J. Welch and G. F. Welch, 2009). Inflation in UK Between 1989 till present (2013), inflation rate in the UK averages at 2.81%. In May 2013, the inflation rate was 2.70% (Trading Economics, 2013). The inflation rates between 2011 and 2013 is shown in the following figure. Figure 3: Inflation rates in UK 2011-2013 (Source: Trading Economics, 2013) Demand side policies to combat inflation The most important tool to control inflationary pressure in the UK has been monetary policy changes. In the UK, the Bank of England adopts a monetary policy that helps
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In the same way, it will provide an analysis into some of the effects of inflation while focusing on the different types of inflation arising from different economic situations. Introduction Inflation is described to be a rate in which the overall price of goods and services is increasing while the purchasing power decreases in an economy (Nicholson 57).
In effect, inflation is the loss or the diminishing of value of money in a given economy (Blanchard 45). In plain language, inflation is the instance where goods and services get expensive or the phenomena where people complain that the price of commodities is rising.
The effects of inflation can affect an economy in positive and negative ways or both positively and negatively simultaneously because it affects the differently. In many circumstances, there are different explanations that could be given to the rise of inflation in an economy and which could explain the reasons why a currency can lose its purchasing power as compared to different circumstance in market.
Businesses are reluctant to make investments during periods of volatile inflation. Countries suffer from a tax rate that is based on pre-inflationary periods that are less than the current value. It also causes exports to go down as prices go up resulting in a trading deficit.
In cases where demand increased tremendously and threatened to augment inflation rates and cause large balance of payments deficits-income, instead of monetary policy, was used as the instrument to keep
This discussion concludes by outlining control measures necessary to manage inflation and the alternatives polices that can be taken by the government to manage inflation.
Inflation refers to increment of price levels in
Inflation refers to increment of price levels in general that is the rise in prices in not on individual commodities but in all areas over a period of time. It’s a change expressed in percentage and compared over
ce, in the 2007, European economies considered improving such conditions; however, the sudden effect of the global credit set in and changed many things including:
4. The ratio of debt to GDP increased- The rise in debt levels and the fall of GDP is a crisis. With increased
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