Also, it refers to the general price level increase because of increasing of consumer which is manifested in consumer price index (CPI). CPI is used by the consuming public to recognize how their purchasing power is getting effected. It aims to compare the cost of purchasing the market basket bought by a typical consumer during a specific period with the cost of purchasing the same market basket during earlier period. (Gwartney, James D.; Stroup, Richard L.; Sobel, Russell S. 1999) Due to real factors, the demand-Pulled Inflation will occurred by issues such as: fall in tax rates, without change in government spending, increase in investments, increase in government spending without change in tax revenue, decrease in savings, increase in exports, and/ or decrease in imports. For instance, buyers started generating more income or more volume of money, thus there will be high demand and the price of the goods or services will be increased.
The first one is the loss of an adjustment mechanism. With dollarization, a country loses the use of the monetary policy instrument as a mechanism enabling it to adjust in the wake of asymmetric shocks and to react to fluctuations in the business cycle that are not in line with those in the anchor country. Accordingly, the dollarized economy has to rely on other adjustment mechanisms to avoid substantial output swings owing to asymmetric shocks or unsynchronized business cycles with the issuing
Moreover if the country wants to use Fiscal Policy in an inflation situation the government should regulate changes in tax and their spending. In regulating tax policies and spending the government need time so the monetary policy is considered the best option when there is an inflation. Deflation in an economy is considered a serious issue around the world because it is considered that it could turn a recession into a full blown depression. This happens due to prices of goods and services are already
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
This is important because when a currency is not stable, prices are rising (inflation) or falling (deflation), and this may lead to distortion and undermine of the country 's long-term economic growth prospects. If inflation is too high, people will worry about their purchasing power of money balances. This will result to a bigger demand and needs for the real assets such as houses and properties, which is considered to be "inflation-proof". There would be less investment in production capacity of the
Different schools in economic literature have proposed various relationships between money and other macroeconomic variables. Before the real business cycle theory, the prevailing thought was that aggregate demand and money stimulus, such as monetary shocks, would have a significant effect on the real economic activity, implying that money would cause economic activity. The concern among the Keynesians, the monetarists, the new classicals and the new Keynesians were not whether monetary shocks had any effect on output but the nature and the transmission mechanisms of these shocks. The Keynesians argued that money changes would influence both economic activity and price level through the interest rate and investment. The monetarists agreed with Keynesian transmission channel in the short run but in the long run they came to the same result with classical economists that money is neutral.
To get the knowledge about the impact of inflation is very important for an investor if it became out of control then plans may destroyed. Exchange rate and stock returns also have a relationship. Foreign depositor changes their profits on stocks into their own cash. Foreign depositor get exaggerated when local cash gets stronger and changed into weaker cash. Exchange rate show negative relation with stock returns.
The second thing is the freeing internal policy and by changing the external price of the currency under the floating exchange rate system of the balance of payments however reducing a deficit can be involve general deflationary policy for the whole economy if a country fixed exchange rate policy is adopted , moreover the floating exchange rate makes the government to pursue internal policy like full employment growth finally the absences if crisis is the fixed exchange rate where usually characterised by crisis however too much pressure was piton central bank to devalue the currency of the country and when the central bank devalue the currency by giving out too much as it will make it run-out of
Normally country’s central bank use macroeconomic tool to slow down an economy or influence macroeconomic conditions. Policies are enacted by a government can classified into 2 main policy which are contractionary policy and fiscal policy. First the contractionary policy is used by the country bank to reduce the money supply and eventual the spending in a country. This is through with increasing interest rates, increasing reserve requirements, and reducing the money supply, directly or indirectly. On the other hand, the fiscal policy is uses to affect the economy attempt to improve unemployment rates, influence inflation as well as control interest rates.
If the price increase persists inflation occurs. (3) Open – Inflation: This is a type of inflation generated by an increase in money supply without a corresponding increase in the volume of goods and services, therefore, too much money chases fewer goods resulting in a rise of the general price level. This could be brought about by excessive bank lending or over-expansion of currency by the Central Bank. 2.3 CAUSES AND EFFECTS OF INFLATION The major causes of inflation widely identified include: i. Excessive deficit-financing and rapidly increasing government expenditure.