Negative Effect To whole economy, the rates of high inflation rates are observed as adverse. Effects of inflation are market inefficiencies, and create complicate for firms to plan long-term finance. Inflation can serve as a burden on productivity as organizations are compelled to change resources away from products and services for targets on profit and losses from inflation of currency. Concern about the power of purchasing in future of money depresses investment and saving and inflation can charge hidden tax raises. Higher inflation in one economy than another will lead to the exports of first economy to become more costly and impact the trade balance in trading internationally Positive
Rising wages are a key cause of cost push inflation because wages are the most significant cost for many firms. (Higher wages may also contribute to rising demand) 2.2.2. Import prices If there is a devaluation then import prices will become more expensive leading to an increase in inflation. A devaluation or depreciation means the rand is worth less, therefore we have to pay more to buy the same imported goods. 2.2.3.
Could you possibly imagine how this government action would impact the economy as a whole? To understand the ups and downs of the economy it is imperative to understand the connotation of inflation, its harms to the economy, and deflation in the Business Cycle. Inflation is defined as a prolonged increase in the general level of prices, and this has a direct impact on the purchasing power and the economy’s health. It is a result of an economic boom or peak (stimulated by various factors) when aggregate demand rises faster than supply can increase. In Econland, the monetary policy that increased money and credit supplying led to inflation.
Since the company weakens supply while demand stays the same, the price will increase. The producer believes that the price will rise in the future and makes a rational decision to slow production, and this decision partially affects what happens in the future. By relying on the rational expectations theory, companies can inadvertently effect future inflation in an economy.
1.0 Overview Summary 1.1 Background of the Study The relationship between inflation and economic growth is a debated topic. According to the Khan and Senhadji (2001), the different level of economic development countries will show the different result of the effects on inflation to economic growth as means that the inflation rate of the developing and undeveloped countries is higher than the developed countries. Besides, the highest the macroeconomic development such as trade openness, public expenditure and capital accumulation bring nonlinearity relationship of inflation to the economic growth. This is because the high volatility of exchange rate and the competition between countries during the trade openness has increased the inflation.
This curve became widely used by policymakers to control unemployment and inflation by manipulating the opposite variable. Acknowledging the inverse relationship between inflation and unemployment shown in the Phillips Curve, Phelps agreed that inflation depends on unemployment and vice-versa, but he challenged the curve's theoretical foundation and argued that the government should not use the curve as a basis for policy. He noted that when the government attempts to lower unemployment below its natural rate through expansionary monetary or fiscal policy, demand increases and firms respond by raising prices faster than anticipated by workers. With higher prices, firms receive a higher revenue and are able to hire more workers. When workers see that their wages have risen, they supply more labor, leading to a lower unemployment rate.
An economy with a production level higher than its natural level will lead to an inflation. The central bank and governments constantly regulate increase in price level of goods and services in order to avoid hyperinflation which would be damaging to a country’s economy. In the medium or long run, an economy with a production level above its natural level can return to equilibrium using a number of methods. In this essay, price is adjusted by wage setters from short run to medium run and central bank implements monetary contraction to lower output. Phillips Curve will be used to show the effect of inflation on unemployment and data on France will be used to illustrate my answers.
The relationship between inflation and unemployment is mainly represented by the Phillips curve. The Phillips curve shows that a change on the rate of wage inflation will result to changes in unemployment over time (Hoover, 2008). A decrease in the unemployment rates would lead to an increase in wage, which would then lead to an increase in the cost to produce a good or service. The rise in the prices of goods and services would then be reflected as an increase in the inflation. Since inflation responds to a sudden change in economic conditions, a way of predicting or identifying the causes that will likely lead to the increase of inflation rate will be extremely useful for policymakers.
Monetary base is the total sum of the amount of money being circulated within a country. It can belong to both citizens, as well as commercial and governmental banks. The doubling of the monetary base is supposed to cause inflation, as by definition inflation is an increase in the money supply. Long-term government bonds will keep investment rates low as well as enable the use of monetary policy, or the ability to control the ebb and flow in the money supply. Thus, the first arrow is almost completely aimed towards causing
No doubt, this will lead to high unemployment due to some firms operating below normal capacity. To combat unemployment in a recession, the government needs to carry out an expansionary policy by increasing money supply and decreasing interest rate. Thus, lower the interest rate will lead to increase in aggregate demand (consumption, investment, government expenditure and net export). Besides that, a reducing bank’s reserve requirement and purchasing government bonds will enhance real GDP increase to the potential GDP and the price level rises, hence eliminate the recession gap. In 1998 (financial crisis), credit flow in Malaysia is slow (UK Essays, 2013).