If the value of interaction variable of the parameter is negative which means there is nonlinear relationship between inflation and economic growth. Based on the result, the interaction variable shown the negative value which means that the inflation and the economic growth is confirmed as nonlinear relationship. 4.2 GMM The GMM model tests the effect of inflation to economic growth through the macroeconomic variables. Based on the result in this research shown that most of the variables are significant as the inflation brings the negative effect to the economic growth except the initial GDP variable which is not significant. The high level of variable will cause the inflation and the economic growth become weak.
How the Exchange Rate Affects Inflation If there is a depreciation in the exchange rate, this depreciation should cause inflation to increase. A depreciation means the currency buys less foreign exchange, therefore, imports are more expensive and exports are cheaper. Therefore, we get: • Imported inflation. The price of imported goods will go up because they are more expensive to buy from abroad • Higher domestic demand. Cheaper exports increases demand for UK exports.
.3.3 Inflation Rate The inflation rate used as an indicator in measuring the stability of economic condition for a particular country (Rashid et al., 2011). In financial theory, inflation rate reflected by consumer price index (CPI) represents all the price of goods and services will go up and it need to take more money to buy the same items. Moreover, high inflation is likely cause a great impact on economic activities of a particular country because it reduces the purchasing power of domestic consumers and it would lead to currency value decline. The previous researchers believe that the inflation rate will influence the stock market return. There are many empirical studies establish that the inflation rate has an impact on stock market
A rise in output will boast the demand for money which will also increase interest rates, as such as, LM curve is upward-sloping. The point where IS and LM curves intersect indicates that both goods and financial markets are in equilibrium. The hike in price level will decrease real money stock and increase interest rate. Hence, this causes the LM curve to shift upwards to a new intersection point with a lower output and higher interest rate. This inverse relationship between output and price level is known as the aggregate demand relation and thus it is
A decline in value of a nations’ currency can also lead to an increase in inflation as prices of imported services and goods will go up. Subsequently, interest rates will be augmented by the central bank but will unfortunately disturb the economic growth and asset markets, and possibly developing into a decline of the currency’s value. There are widespread, two ways of intervention in foreign exchange market by central banks. The one is unsterilized foreign exchange intervention. Central banks usually buy and sell international
The first and foremost aim of the Central Bank is to maintain the inflation level to the minimum. The Quantitative Easing policy is differing and very inflationary since it uses money for both lending and keeping as reserves. Nevertheless the economic policy on the other hand states that the effect of inflation will be good when Quantitative Easing is used, when the economy goes down as it will encourage the economy as a whole initially. But it will create problems in the longer run as the effects of such a simulation will be an extreme challenge to deal with when the economy gradually recovers. Secondly, quantitative easing can lead to a fall in the interest rates in the short term and an increase in the rate of inflation in the longer run, hence causing an instability in the financial system as well as an increase in the interest rates, therefore it is essential for the central banks to keep the interest rates
Inflation is most often perceived as the upward persistent rise in c CPI. Alternatively, a generally persistent fall in general price level is termed “deflation”. A stable low rate of inflation enables households to make sound judgements about the consumption-savings patterns. When inflation rate experiences undulating features, periods of high inflation, holding income and other factors constant, induces households to spend more of their income just to maintain same previous utility from consumption. Also, high levels of inflation raise the opportunity cost of holding money balances, in so doing savings reduces (Miller and Benjamin, 2008).
Caused by: Demand pulled inflation is caused by monetary and real factors (the increase in money supply government spending and foreign exchange rates). Cost pushed inflation is caused by monopolistic groups of the society. 3. Output: Demand pulled inflation: the output raise until employment is fully achieved. Cost pushed inflation: the output fall down since the supply is reduced.
Also if there`s a decrease in supply or the expense to process these products increases, therefore putting pressure on the price of the goods. When supply decreases the demand doesn’t decrease that easily and companies have to increase their prices to make up for the profit lost. Below is a diagram showing what happens during cost push inflation when supply and prices increase. As seen from the diagram the supply curve (S0) met the demand curve at point Z, the equilibrium. Then supply increased and prices increased with it at point Y, the new equilibrium.
In some cases, it may increase the burden on the general economy especially if the country is currently suffering from high inflation and unemployment rates. If a Fixed Exchange rate policy was used it may alleviate or reduce these existing problems since the Central Bank would have a “closer watch” on the market and intervene as it deems fit. Interest rates, economic policy and stability within the economy promote a strong currency. A strong currency boosts the prices of exports thereby affecting the country’s ability to compete on the global market. However, whenever the currency is weakened, the cost of imports increase which increases domestic inflation.