ipl-logo

Economic Growth Theory

2182 Words9 Pages

THEORETICAL FRAMEWORK 2.1. Inflation and Economic growth Theoretical discussion From many years ago, the relationship between inflation and growth was a debatable topic among economists. More economic theories were developed by various theorists and schools to explain relationship between inflation and growth. These theories are founded on various study of the phenomenon but no theory gives full explanation. The former inflation-growth theories were built on cyclical observations. The persistent inflation is observed as a post world war II phenomenon (Gokal & Hanif (2004)). During the period of after II world war, the theories suggested a positive relationship between inflation and growth. The Keynesian school of thought raised the same argument. …show more content…

Super neutrality happens in economy when the steady state 's capital stock and consumptions are free from money expansion in long run. His illustration proved that an increase in the capital stock increases consumption and the real value of the stock of cash in two ways; it raises disposable income and its associated stock of real wealth. Hence decreseasing the rate of change of the capital stock, it raises net output and as result, accelerates capital accumulation. His model also shows that an increase in the expected rate of inflation reduces the demand for money; it therefore leads to rise in price level. Sidrauski concluded that there is no relationship between inflation and economic growth, as rises in the inflation rate does not influence the steady state capital stock. Both output and economic growth are not …show more content…

Keynesian Theory The birth of “The general theory of employment, interest and money” in 1936 by Keynes has provided the basis for analyzing modern macroeconomic policies, and is usually referred to as the Keynesianism. Keynes argued that if economy is in recession period, Government could maximize economy (full production and total aggregate demand) through increase in government spending or tax cut to increase investment and consumption. Therefore, government influences through fiscal policies will drive up investment and demand to attain full productions. Keynesianism has been used aggregate demand (AD) and aggregate supply (AS) framework to analyze the relationship between output, inflation and employment. The Keynesian View of the AD/AS Model uses an SRAS curve (see figure1), which is horizontal at levels of output below potential and vertical at potential output. Look at the AD/AS figure, for the potential output (Yp), if AD decreases, output is changed but price is constant while increase in AD affects only prices and output is kept constant. Then economy begins at intersection of AD and SRAS at P0 and Yp, starting from the potential out level (Yp) which presents full employment in economy, thus AD is volatile and can fall easily in the recessionary gap, Therefore economy remains in equilibrium (Y1) but below full employment and Keynes supposed that for certain period, the economy will hold recession gap with targeted rate of

Show More
Related
259 Words | 2 Pages

This resulted out of control inflation where paper money downgrade the value of its worth. Failed to pay close attention and monitor the spending resulted in a semi depression.

Read More
493 Words | 2 Pages

In chapter 8, the core economic principle that displays itself often is The Consequences of Choices Lie in the Future. This principle presents the idea that what we are doing in today’s economy will have an impact on the future. Whether it is decisions on cutting benefits or raising taxes, any of these could cripple our futures economy. In the chapter, it discusses the fiscal policy and how it saved America’s economy after the depression. By monitoring the nation 's spending budget and taxes, so another depression or a recession does not occur.

Read More
1274 Words | 6 Pages

This new common sense greatly reflected Keynesian views of the economy. Not only did this new common sense become popular in the United States, but it also became popular throughout the world. Many countries began to adopt this new common sense, especially after World War II. Globally, there was a common agreement on the belief that government intervention in the market was not a bad thing, but an essential key factor in maintaining a healthy economy. Following Keynes’s ideologies, the United States government increased the budget deficit to help other countries whose economies were destroyed by the war recover their economies.

Read More
148 Words | 1 Pages

The economy changed as well, due to the revolution, because of the war period there was respect for debt, taxes and agriculture. The direction for the development of economic growth was still a quarrel between the North and the South. A good example for the Northern view point on economic growth is Alexander Hamilton. Alexander advocated for the development of an economy based on industry with a central focus on urban growth. However, Anti-Federalists or, the Southern viewpoint, thought it best to have an agrarian society that contained large slave populations.

Read More
800 Words | 4 Pages

Furthermore, the diagram illustrates how the public is finding occupations to fill. This decline in unemployment is quite effective mainly due to the fact that more citizens will have money to spend contributing to the airing of the economy. Now that individuals are working, they are becoming consumers in which supply and demand will soon become into effect. This would lead to more jobs being created in order to support the demand for

Read More
1286 Words | 6 Pages

Ronald Reagan: An Era of Steady Economic Growth In a time when there was a lack of jobs, rising inflation, and an energy crisis all affecting the country, there was no doubt that Jimmy Carter, the sitting president at the time, would clearly be challenged by his opponent, Ronald Reagan. Reagan, a former governor of California, was known as a great communicator from his days being a governor. Reagan, who was best known at that time for the time he spent as a Hollywood actor and governor, came from humble roots, born and raised in a small apartment without running water and indoor plumbing. Later on, Reagan attended Eureka College in Illinois.

Read More
111 Words | 1 Pages

When it comes to the thought-provoking question of what is limiting economic growth around the world there is no definite answer. Dean Kamen is the founder of SlingShot a water purifier Kamen in the documentary not only identified the problem he proposed a simple solution--clean drinking water. Resources contribute to economic growth and water is a resource unfortunately many countries don’t have access to clean drinking water. How can you have economic growth when half of the population is sick and not don’t have the ability to work because of the water contamination? Although, we are currently on macroeconomics this was shown on a micro level with the Flint water crisis.

Read More
711 Words | 3 Pages

The Great Recession started for the United States in December of 2007 and lasted until June of 2009. This was the worst recession in U.S. History since World War II. During this time, there was a 6.1 % loss in jobs, due the job shortages about 27 million people we either unemployed or underemployed. This affect the age household many people household income dropped increasing the poverty in America. In economics, a recession is a decline in economic activity affecting Gross Domestic Product or GDP for at least two consecutive quarters causing negative economic growth (Downes and Goodman).

Read More
676 Words | 3 Pages

Since the creation of the Federal Reserve, inflation has been a persistent, ongoing problem within the United States (Durden, 2013). Since the Federal Reserve is owned by the banks, it is not surprising that it serves the interests of the bank over the American population, and therefore goes against the idea of a free market and biblical principles (Durden, 2013). The value of money is constantly changing and it subject to manipulation by the Federal Reserve. For example, the Federal Reserve can randomly produce money, and add it to the money system, which devalues the currency already in place, and adds to inflation. This is one reason why the value of the U.S. dollar has fallen by 83 percent since 1970 (Durden, 2013).

Read More
989 Words | 4 Pages

His book titled “The General Theory of Employment Interest and Money” was published in 1936 i.e. during the Great Depression and became the basis of modern macroeconomics. Keynes supports government intervention during economic turmoil in the capitalist economy. Keynes believed that it was the role of the state to build a bridge between the economy’s potential and its actual output during any financial crisis. His book “General Theory” was written during the period of great depression and was mainly the product of his prolonged study of unemployment in Britain. The post World War II era witnessed abrupt changes in the area of economic development.

Read More
791 Words | 4 Pages

Keynesian economic theory relies on spending and aggregate demand to define the economic marketplace. Keynesian economists believe the aggregate demand is

Read More
1564 Words | 7 Pages

On the other hand, inflation rates have a negative effect on the growth of the advertising industry. Inflation rates affect the prices of goods and services which also affects the purchasing power. If the purchasing power of the consumers decline, manufacturing industries will experience low returns. They will shift the burden to the advertising industry by reducing investment in the industry and therefore affecting growth. The other economic factors also affect growth in one way or another (FME, 2013).

Read More
1729 Words | 7 Pages

Inflation is the rate at which the general level of prices for goods and services is rising, and, then purchasing power falling over a period of time. When price level rises, dollar buys fewer goods and services. Therefore, inflation results in loss of value of money.

Read More
1055 Words | 5 Pages

CHAPTER 2 LITERATURE REVIEW INFLATION (InvestorWords, 2015) stated that inflation is the increase in the general price level of goods and services in economy, normally caused by excess supply of money. Inflation usually measured by the Consumer Price Index (CPI). When the cost of producing goods and services goes up, the purchasing power of dollar will decrease. A customer will not be able to purchase the same goods and services as he/she previously could.

Read More
1571 Words | 7 Pages

Along these lines, unemployment may decrease, as this has different favorable circumstances, for example, lower government using on profits and less social issues. However, this phenomenon includes a number of different expenses. Firstly, if economic growth is unsustainable and is higher than the long run pattern rate, inflations are liable to be seen. An increase in economic growth could prompt an equalization of issued installments. In case the expanded customer expenditure causes further development, there will be an increase in the import sector.

Read More

More about Economic Growth Theory

Open Document