Hyperinflation In Banque De France

An economy with a production level higher than its natural level will lead to an inflation. The central bank and governments constantly regulate increase in price level of goods and services in order to avoid hyperinflation which would be damaging to a country’s economy. In the medium or long run, an economy with a production level above its natural level can return to equilibrium using a number of methods. In this essay, price is adjusted by wage setters from short run to medium run and central bank implements monetary contraction to lower output. Phillips Curve will be used to show the effect of inflation on unemployment and data on France will be used to illustrate my answers.

The aggregate supply curve is derived from wages and prices.

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

The GDP growth rate in table 1 decreases from 6.99% to 5.35% from 1982 to 1983, similarly table 2 shows GDP growth rate falling from 1.59% to 1.08% during 1980 to 1981. This drop in GDP growth rate shows that output level is being reduced to its natural output level. Furthermore, interest rates increase from 0.28% to 0.96% in the year 1969 to 1971 and 0.76% to 2.32% in the year 1980 to 1981. The rise in interest rates is due to the effect of monetary contraction enacted by the central bank by directly or indirectly reducing nominal money. On both occasions, inflation decreases from 6.04% to 5.4% and 13.54% to 13.33% respectively, whilst unemployment rate increases from 2.20% to 2.38% and 5.38% to 5.99% respectively. The data of declining inflation and rising unemployment supports the Phillips curve shown in graph 3.

In conclusion, contractionary monetary policy is an effective tool for the central bank in order to reduce output level to its natural level. In reality, this policy alone might not be sufficient for the central bank and the government to achieve their economic objectives. As such, mixed policy should be implemented instead. Policy mix is the combination of monetary and fiscal policy being used at the same time. Hence, the central bank and the government must work together to effectively manage the