Inflation occurs when the buying power of a dollar decreases. “As inflation rises, every dollar you own buys a smaller percentage of a good or service. When prices rise, and alternatively when the value of money falls you have inflation” (Hayes). For this reason a minimum wage increase would never work. If employers are paying employees more then they will raise costs to offset the added expenses.
As a decline in nominal money will increase interest rates, people will be disinclined to borrow money and consequently, inflation will be reduced as consumers will now have less money to spend. This process is illustrated in Graph 3 where the decrease of inflation is the movement along the Phillips curve, the decrease of inflation from μ to μ’ increases unemployment from U to U’. In short, the Phillips curve shows the trade-off between inflation and unemployment and policy makers should fully exploit it to achieve economic
A failure of the Central Bank to region in the MS also makes the demand- pull inflation worse. Next, cost -push or supply -side inflation. Under cost -push or supply -side inflation, it occurs when the price of input increase. If price increase, it will lead to decrease the ability of producer to generate output because their unit cost of production increase. The third cause is expectations of future prices.
Following diagram will help understand how this affects economy. Since AD is falling (AD 1 to AD 2) the equilibrium shifts from point X to Z, this causes price level to fall from P1 to P2, thus reducing inflation. However, there is another problem arising because of that, because AD is falling, economy is no longer able to grow at the same rate. Additionally, falling AD could cause unemployment of Yfe-Y1. As a result, implying higher interest rates will help with achieving lower inflation rate, but it could incur additional problems such as slower economic growth,
Since wages are likely to remain ‘stuck’ up at W2, the aggregate supply labour will be greater than aggregate demand for labour and unemployment a-b will be created. There is solution for demand deficient unemployment. The government can intervene to bring about an increase in aggregate demand through the use of fiscal or monetary policies. Government can use expansionary fiscal policy by increasing government spending or lowering taxes to increase the consumption by household and investment by firms, thus increasing the aggregate demand to solve this unemployment. However, there is no guarantee that people will spend their extra disposable income.
In order to achieve these objectives the economy needs to have macroeconomic policies with instruments which will help achieve those objectives. These macroeconomic policies and their instruments are 1. The fiscal policy: This involves all intentional efforts by the government to use changes in government expenditure, government taxation, and government borrowing to influence aggregate expenditure so
4.2 Reasons for inflation and deflation and ways to stabilize the economy Inflation can be defined as the increase in prices of goods and services over a period of time. Whereas, deflation is decrease in prices of goods and services over a period of time. In an inflation situation consumers stop spending money (as much they are used to), due to that production declines, it leads firms to cut down employees and exports will be dampened. Overall there will be a decline in the economy. So to overcome this a country can either use Monetary or Fiscal policy to stabilize the economy.
Abstract This paper verifies whether a rise in Inflation rate can lead to Currency appreciation or not. Our primary hypothesis was that currency depreciation is actually the inevitable cause of a rise in the inflation rate; however there can also be a few instances where in fact a rising price level can lead to a fall in the Exchange rates. The paper begins with a summarised description along with the literature review involving cases where the economists and researchers support “Depreciation” or “Appreciation” followed by a rise in the price level. Then we have showcased an empirical analysis using a simple regression (OLS method) to capture how the net inflation rates are correlated to the Exchange rates. Our end result, although somewhat
A review of these macroeconomic policy shows inflation has accelerated to double digit level, despite the lofty place of fiscal policy of the economy. Government has the responsibility of preventing calamitous economic depression by proper use of fiscal and monetary policy as well as close regulation of the financial system. Recently, government has become concerned with financing economic policies which boost long-term economic growth, the intent of fiscal policy is essentially to stimulate economic and social development by pursuing a policy stand that ensures a sense of balance between taxation and expenditure and borrowing that is consistent with sustainable growth
A country’s economy is controlled by two types of economic measures – fiscal and monetary. While the fiscal policy is framed and implemented by the government with regulation of its spending and collection of revenue, the monetary policy is controlled by the central bank of the country (in India, it is Reserve Bank of India). These policies are designed and implemented for the expansion or contraction of the economy. Policy measures aimed to increase the gross domestic product (GDP) and the economic growth are called expansionary. The measures taken to check an inflationary economic trends are called contractionary measures.