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Macroeconomic Policies of UK Government in Achieving Objective of Low Inflation - Essay Example

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This essay concentrates on the efforts and measures put in place by the United Kingdom’s government to tackle inflation. The UK has always strived to ensure that there is low inflation, low unemployment levels, high rate of economic of economic growth, and equilibrium in balance of payment…
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Macroeconomic Policies of UK Government in Achieving Objective of Low Inflation
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"Macroeconomic Policies of UK Government in Achieving Objective of Low Inflation"

Download file to see previous pages Mills argue that the United Kingdom has over the years had elaborate strategies to counter high inflation; the strategy targets the underlying rate of inflation (112). This strategy is justified because besides helping to control the level of inflation, it is also instrumental in checking the interest rate and the retail price index. In a bid to maintain a low level of inflation, the government has to contend with the unemployment in the economy. Currently, the rate of unemployment in the United Kingdom is 7%, while the inflation rate is 2.7% (Gordon 220). This rate of unemployment is not badly off as it shows that United Kingdom’s economy is at near full employment. High unemployment levels have adverse social and economic cost to the economy. Unemployed have low purchasing power, hence the rate of consumption is low (Gordon 220). The other characteristic of unemployed is that unemployed people lose their skills and morale with time; hence becoming less productive in the economy. The government is obliged to incur extra public expenditure to provide social benefits to the unemployed population. Finally, the adverse effect of high employment rate is that it results in increased cases of social evils such as crime, prostitution, and vandalism. In a bid to cushion the economy from inflation, the United Kingdom’s government permits some level of inflation in the economy. Striking a balance between inflation and unemployment brings about the concept of Philips's curve. Philips curve suggests that there exists a tradeoff between inflation and unemployment. As the UK government tries to thwart inflation, the rate of unemployment also goes up as shown in Figure 1. This is the case because the two macroeconomic elements have opposing...
This paper analyzes the complex interrelationships between certain sets of macroeconomic policies in order to achieve opposing planned objectives of low inflation, employment and growth rate. In a bid to maintain a low level of inflation, the government has to contend with the unemployment in the economy.
Striking a balance between inflation and unemployment brings about the concept of Philips's curve. Philips curve suggests that there exists a tradeoff between inflation and unemployment. As the UK government tries to thwart inflation, the rate of unemployment also goes up. This is the case because the two macroeconomic elements have opposing fiscal and monetary policies that are used to fight them. Inflation requires contractionary economic policies while unemployment requires expansionary fiscal policies. During high inflation, the government is forced to reduce public expenditure and increase the interest rate to reduce the money supply in the economy.
However, when the government reduces the amount of public expenditures or the interest rate, the level of employment will go down.
The most practical level of inflation and unemployment should be 3%; this scenario means that the economy is at near full employment, and the prices of goods and services are stable judging by the consumer index price.
The bank of England is responsible for ensuring that UK’s economy attain sound macroeconomic levels in terms of price stability, full employment, economic growth and equilibrium in the balance of payment. ...Download file to see next pagesRead More
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