Moreover, the total money stock in circulation along with spending will decrease. As demand for goods and services drops, businesses will have to accept a loss on profit margins and absorb the high input cost and reduce the prices in order to encourage sales. On the other hand, tightening policy could be harmful to the economy if economic agents does not accept to loss profit and to absorb cost burden. 2. Price control - is another policy that can be used to combat inflation.
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).
Why the simultaneous targeting of the money supply and interest rates is sometimes impossible to achieve? The fact is that the central bank can not simultaneously regulate both the money supply and the interest rate, since both these indicators determine the coordinates of the money market equilibrium point. If the central bank aims to maintain the interest rate at an unchanged level, then as the interest rate rises as the demand for money increases, the central bank must increase the money supply, and so it can not control the amount of the money supply, and it becomes of an exogenous amount by an endogenous value, completely subordinate goal of keeping the interest rate unchanged. Conversely, if the central bank aims to maintain a constant
inflation is defined as a long term rise in the general level of price for goods or service which caused by the devaluation of currency. The Inflationary problems arise when we experience unexpected inflation which is not totally associated by the rise of households incomes, but if the incomes do not increase as the price of goods increased the people purchasing power will effectively reduce and that may lead to stagnant economy. Moreover, excessive inflation can also effect badly on retirement savings as it reduces the purchasing power of the money that savers and investors have. The two main types of inflation are:- 1- Demand Pull Inflation- this occurs when the economy grows quickly and the aggregate demand (AD) increases at a faster
Inflation inflation is the long term rise in the prices of goods and services caused by the devaluation of currency or a general increase in prices and fall in the purchasing value of money. Through light over the effect of inflation 1)Business competitiveness: On the off chance that one nation has a substantially higher rate of swelling than others for an extensive time frame, this will make its fares less cost focused in world markets. In the long run this may appear through in diminished fare orders, bring down benefits and less occupations, and furthermore in a compounding of a nation's exchange adjust. 1.1)Inflationary development has a tendency to be unsustainable prompting a harming period of boom and bust monetary cycles. For instance,
Decrease tendency to Spending • Indirect taxes (eg VAT, Excise Duties) make goods more expensive, reducing demand 2. Decrease tendency to Saving • Tax on savings reduces the incentive to save 3. Decrease tendency to Investment • Investors (both domestic and foreign) will invest elsewhere, or not at all • Less investment means less production, and – perhaps more importantly – less jobs 4. High Inflation Rate • Indirect taxes make goods more expensive – thereby adding to the inflation rate 5. Wage increase requests go up • The increased inflation and reduced after-tax incomes can create a lot of wage demands 6.
An expansionary approach fabricates the total supply of trade out the economy rapidly or reduces the financing cost. Right when the national bank needs to finish an expansionary monetary approach, it goes to the security market to buy government securities with money, accordingly extending the money stock or the trade accessible for use out the economy. Expansionary approach is for the most part used to fight unemployment in a subsidence. A contractionary approach of course decreases the total money supply or grows it just step by step, or raises the financing cost. Right when the central bank needs to complete a contractionary money related course of action, it goes to the security market to offer government securities for trade out this way decreasing the money stock or the trade accessible for use out the economy.
This means that changes in the interest rate can have a big impact on consumption and investment spending. The interest rate tends to increase and decrease as the price level increases and decreases. This means that a higher interest rate raises the cost of borrowing and discourages investment and consumption spending, whilst a lower price level has the opposite result. In summary, lower interest rates make it cheaper to borrow. This tends to encourage spending and investment.
Demand pull inflation is when total supply of goods and services is insufficient to meet total demand for goods and services by the economy. Cost push inflation is the price increase as a direct result of the increase in the production cost mainly labor cost. The increase in wages and salaries are handed on to consumers in the form of higher prices. Imported inflation occurs when inflationary pressures which develop overseas are transmitted to the domestic economy through the mechanism of international
The different types of inflation are: Demand pull inflation – This occurs when AD (Aggregate Demand) increases at a faster rate than AS (Aggregate Supply). It exists when the economy is growing faster than the long run trend rate of growth. When demand exceeds supply, firms respond by pushing up prices. Cost push inflation – This occurs when firms raise prices in order to maintain or protect margins after experiencing a rise in the cost of production. Wage inflation – This is a combination of demand pull and