Thus, in the long term, the government should attempt more on interventionist supply side policies such as investment in human capital, new technology, infrastructure and industrial policies. These policies affect to improve the factors of production and increase productivity, leads a rightward shift in the AS curve so to make both lower unemployment and inflation for the long run. That is why Greece is facing this problem right now and there is persistent high employment for a long
In contrast to demand-side economics, the republicans often refer to the idea of supply-side economics which was developed by the economist Arthur Laffer. Made popular during the Reagan administration, supply-side economics involve tax cuts, which in theory increases the amount businesses and people make, putting more spending money into their pockets, spurring economic growth. Both economic policies do something good for the people in the country, igniting what is known as the Two-Santa theory. While the democrats lower unemployment the republicans give the nation a tax-break. Both have downfalls though, demand-side economics involves frivolous government spending that comes from other taxpayers and does not include long term employment but rather a lot of short standing jobs.
Inflation What is inflation? Inflation is defined as a continuous increase in the price level of goods and services along with a decrease in the purchasing power of the money. It is measured as an annual percentage increase with respect to a standard. Causes of inflation: There are many causes of inflation; some of them are as follows: 1. Demand Pull Inflation: This sort of inflation occurs when aggregate demand is more than the aggregate supply leading to decrease in unemployment (as per the Phillips curve).
The impact of taxes and public spending on economic growth has become a subject of much discussion and debate among economists. This is partly because there are many theories regarding what propels and facilitates economic growth: while some favour the Keynesian demand side factors, others Neo-classical supply side factors, while yet others consider a mixture of the two or another theory altogether. However, the world economy is sufficiently large and complex enough so that any theory can find some support in the data. By implementing changes in tax rates and public spending, the government can influence the economy, through what is popularly known as fiscal policy. There are strong proponents as well as opponents for cutting taxes and public spending.
Monetary policy is enacted by a central bank that controls money supply that is circulating in the economy. This money supply influences inflation and interest rates that determine consumption level, employment rate and cost of debt. Expansionary monetary policy involves in buying treasury notes and declining interest rates on loans of central banks. These actions help in making the money supply to increase and making interest rates lower. This policy also makes consumption to be more attractive corresponding to savings.
It focuses on the excess in demand. Cost pushed inflation is occurred when the raising in the price level of production costs (inputs), which could lead to reduction in the aggregate supply of outputs. It focuses on the decrease in supply. 2. Caused by: Demand pulled inflation is caused by monetary and real factors (the increase in money supply government spending and foreign exchange rates).
One way to do this is by spending in things of value to people which they cannot otherwise attain. Spending on infrastructure, healthcare, and education also provides an external benefit to the rest of the economy which can have long run effects in comparison with reductions in interest rates, which are often short-term. One of those is equity. While most of us would prefer to see less inequality and poverty, individually we do not have much of an incentive to do something about it, since a large share of the benefits go to others. Myrdal (1960) stated that a greater government involvement in the economy can foster growth because the greater involvement can be used partly to reduce social inequality, which is seen as detrimental to growth for at least two reasons.
On the contrary, if a country’s currency depreciates then it leaves an impact on the imports of the country, making it more expensive. Hence, the demand for the exports increases which results in Demand-Pull Inflation which arises due to the condition where the demand of goods is more than its supply and increase in demand leads to increase in price of good because supply is the limiting factor. This is how inflation and exchange rate affect each other. Both Exchange Rate and Inflation play a crucial role in every economy, that’s why it is necessary to study the impact of both on the stock
The cost push inflation is caused by a drop in aggregate supply (potential output), this may be due to natural disaster, or increased prices of inputs e.g. a sudden increase in oil may lead to increased oil prices, and can cause cost push inflation. Cost push inflation happens when production costs rises. Sellers can no longer supply the same output at current prices, and again demand-pull inflation is set off by an increase in demand for goods and services without any increase in supply. Some of the major effects of inflation are as follows: 1.
Evaluation of inflation: Inflation is the maintained and recurred rise in the general price level or the continued change in the currency value of a specific country. According to Frisch, “inflation is a process of continuously rising prices, or equivalently, of continuously falling value of money” (pp 9-19). Inflation is a very harmful part of economics to the economy as it may bring long term effects as well as short term effects to an economy. According to economists, inflation is one of the factors why some countries lag behind in terms of development level. However, inflation is a necessary evil for the growth of any economy (Young, 1).