aggregate output/income. And another reason-being that, Central bank will attend to bring down inflation by rising interest rate, which will lead to a decline in consumer spending and investment spending. As a result, we will have a recession. On the other hand, Inflation can be damaging to the economic growth since it induces economic agents to divert away their funds from productive activity and productive investment in an attempt to avoid the inflation effects on income (small 1998:37). During inflationary period people get confused and become uncertain about what spend to their money on or where to invest it.
In as much as inflation causes harm on the economy, it also helps in lifting it up and also ensuring the governing authority is executing its mandate. For example, when inflation occurs, it makes the macroeconomic sections arm of the government to review their policies and exchange systems and think of new macroeconomic policies to stabilize the economy. Moreover, inflation ensures that there is more money flowing in the economy since people literally break the banks to get cash so that their cash at hand can match the hiked prices (Chand, 1). However, this might have a long term effect of leading to a rise in a valueless currency. For example, in the case of Zimbabwe in Africa, inflation completely devalued its currency hence you might have to carry a whole large bag of solid cash and only exchange the cash with a small
History has shown that too much tightening of monetary policy to solve cost-push inflation will lead the economy to a recession. The central bank should tread carefully on how high to take interest rate. Increment in interest rate will lead to high cost of borrowing; thus, it will ultimately slow down the economic growth (Taing, 2014). This can also be linked to the theory that is covered in the unit plan. During the cost-push inflation, the government intervention by using contractionary monetary or fiscal policy will shift the aggregate demand curve to the right, thus, the price level decrease but the output level will decrease
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
In some cases, it could be defined as falling prices and substantial unemployment. Also, according to Van Der Merwe and Mollentze (2010:19) said Deflation is the opposite of inflation. Deflation is therefore a continuous decline in the general price level of the economy. 2. Reflation Reflation means normalising prices that have previously fallen.
Solution to solve inflation In order to solve inflation- regulate the transferring of foreign currency reserves by government . Also it can impose restrictions in the transfer of foreign currency reserves outside of the country. Also to solve the problem of inflation is to lift certain import controls. This will be able to lessen inflation because the depletion and reduction of the foreign currency reserves will be
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.
Hence, deflation will encourage investors and purchasers to gather and hold money on hand, rather than investing in solid and assured securities. Since the investors are scared of investing and businesses are not generating significant profits, many other investments may tend to yield a negative return or even highly volatile. Therefore, the stock market will decline as the investors reduce their investment
TRODUCTION inflation is a sustained and considerable increase in price of goods and services in a country which result in decrease of purchasing power of money. For inflation to occur they must be an increase in all or most goods and services of price in general. Inflation is an economic measure, that tell us how well our economic. Objectives of price stability is achieved countries aim to have price levels as stable as possible in order make it possible for people to for the future. Increasing price reduce the buying power of people it will make people poorer and will create uncertainty about the future MEASURING INFLATION CONSUMER PRICE INDEX (CPI) For the most widely used in inflation measure.
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,