Brazil's central bank hopes to lower inflation by keepingbenchmark interest rate unchanged at 14.25%. This interest rate is the highest rate ever in nine years of Brazil to deal with inflation. Interest rate is the amount of charged, as a proportion of the amount lent, that the borrower has to pay for the lender. The central bank is politically independent and often charged with the sole task of maintaining a low and stable rate of inflation. It does so by managing the interest rate. Inflation is defined as a persistent increase in the average price level in the economy, usually measured through the calculation of a consumer price index (CPI).
High interest rates will affect both investment and consumption, which will affect the aggregate
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Thus, cost-push inflation will occur and there will be a shift inward of short-run aggregate supply curve from SRAS1 to SRAS2(as shown in figure 2, SRAS shift inward from SRAS1 to SRAS2) leading to an increase in the price level from P1 to P2 and a fall in the real output from Y1 to Y2. A weakening currency which makes fuel and other imports more expensive in Brazil will also lead to an increase in the costs of production to the country’s firms. Therefore, cost-push inflation which occurs as a result of an increase in the costs of productionhigh interest rates should lead to appreciation of currency. Therefore, decrease in prices of imports and costs of …show more content…
First are demand side policies which there are fiscal policy and monetary policy. Fiscal policy will increase income taxes to decrease disposable income, lower corporate taxes to cut back on investment and lower government spending. These will directly impact on aggregate demand to decrease the price level. For monetary policy government could increase interest rates and reduce the money supply. However, in the long run these will have an effect on unemployment that will rise up and getting even worse. Moreover, most people are unlikely to be happy to accept higher taxes as it reduces disposable income and the level of consumption. A reduction of government spending may result in less people will support the government. Demand side policies will bring down the price level (reduce inflation), but they will result in lower national output and rise in unemployment. Therefore, government could use supply side policies to deal with the unemployment situation such as in interventionist supply-side policies will increase the levels of human capital of an economy by support education and training institutions with subsidies or tax benefits and for market-based supply-side policies will reduce trade union power. Trade union power will lower the costs of production to firms and increase the number of workers that firms may hire. Although supply side policies can decrease unemployment,
Keynesian economics suggests that increasing government spending and decreasing tax rates are the better ways of stimulating aggregate demand, and reducing spending and increasing taxes after the economic boom begins. For this case, the federal government will increase its spending up to the point where the inflation starts to rise while unemployment has decreased to lower levels. For the economic growth to be attained at a preferable rate, then the government should spend on public such construction of roads, incentives to producers and provision of essential services to producers for them to thrive. The expenditure will indirectly trigger the producers to produce thus leading to attainment of desired economic growth while keeping inflation at a low
Thus, providing a huge decrease to the unemployment
The Fed is often aiming to achieve a goal of maximum employment or near-zero unemployment. However, the goal of maximum employment conflicts with the goal of stable prices. Usually, the Fed aims to reduce prices, but that usually causes unemployment to rise. Generally, attempts are made to guarantee that there aren’t any significant price drops or increases.
By doing this people have to work till a very old age. Also, by increasing taxes, or other expenses. In reality, all these happens for a reason. If the taxes are raised, we have to keep in mind that there’s a lot of money being spent for us the people. For example, health care, public schools, public transportations, etc.
On the bright side, there is greater purchasing power for workers with the revenue going back to businesses they patronize and products or services they avail of or purchase. They may be able to afford more in terms of living expenses and other expenditures
In the short term, this type of economy will use government spending on education, infrastructure, and unemployment benefits. It also will add money into the economy leading to an increase in employment, tax revenue, and production. The Keynesian policies goal is to reach stability and it uses the government to get there. Nonetheless, this only works in the short term and not the long term. Due to the government increasing its spending, it puts the economy at the risk at increased inflation and living cost.
Like an investment, the government puts money into society, hoping to get a more substantial amount of money back. But with unemployment low the government is investing money into society and the investments are not paying off. The unemployed (7.8 million people) can’t or won’t pay and middle class doesn’t make an effective salary. If a significant amount of people are not working that means the government is missing out on vital income tax. And the middle class alone can’t fight off the $19.3 trillion dollars of debt.
Instead, businesses rationally respond to such mandates by cutting employment and making other decisions to maintain their net earnings. These behavioral responses usually offset the positive labor market results that policymakers are hoping for.” There is a large misconception that low wage jobs are meant to be permanent jobs when in fact these jobs are meant to be temporary. Low wage jobs should be seen as “first jobs”
Tax cuts reduce the recessionary gap. Therefore, in order to eliminate the recessionary gap, there is need for falling tax collections i.e. tax cuts. 9. Classical economists assumed that the market forces through flexible prices, wages, and interest rates would move the economy toward potential GDP (McEachern, 2015). The assumption economists believed that natural market forces such as changes in prices, wages and interest rates could correct the problem of the market, thus the market is self-correcting.
This policy also would increase consumer confidence and stabilize prices. Another pro is that by reducing government spending we can slow down inflation. The cons of the Restrictive Fiscal Policy are however that there is a slowing down of production. Due to the reduced money supply companies must cut back on their operations or manufacturing; this also leads to a higher unemployment rate. The reduction in the supply of money causes prices to lower and for there to be less of a demand…thus causing a reduction in economic
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
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.
Decline in demand will naturally reduce the flow of resources to service and production of goods, which may damage employment and increase inflation. Natural changes in the prices, wages and interest rates cannot solve the problems in the short run, then the harms which is occurred in the short run can give a rise to bigger devastation in the long run. Keynes clarified his pessimism for the future with these sentence ‘’In the long run, we are all dead’’ According to Keynes, the reasons of recession and unemployment are occasionally the measures that people take to avoid them. If households want to save more than firms ' investment desires, output and employment levels in the economy will decrease.
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.
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.