This is primarily a tool at the disposal of the central bank of a country which uses different tools to manage the macro economic variables of a country to keep the economy stable or to stabilize it in situations of fluctuations. Monetary policy can be expansionary or contractionary depending on whether the money supply is being increased or decreased in the system so as to affect economic growth, inflation, exchange rates with other currencies and
Inflation is a rate at which general price level increases for goods and services produced in a nation. When inflation exists, the purchasing power of a nations currency declines over time. Inflation not only reduces the level of business investment, but also the efficiency with which productive factors are put to use. The benefits of lowering inflation are great, according to the author Dornbusch, but also dependents on the rate of
The Keynesian theory enumerated three principle tenets in which it would affect aggregate demand thus achieving equilibrium in the economy and these include private and public economic decisions have great impact on aggregate demands, prices respond slowly to changes in supply and demand and lastly alterations in aggregate demand either anticipated or unanticipated have effect on real output and employment
When workers see that their wages have risen, they supply more labor, leading to a lower unemployment rate. Workers may not realize immediately that their purchasing power has fallen due to quickly rising prices, but over time, their expectations and understanding changes and they begin to supply less labor, thus resulting in the natural rate of unemployment and high inflation. Phelps illustrates this phenomenon in his expectations-augmented Phillips Curve. His contributions have better explained the relationship between unemployment
Development is a normative concept due to which there is a constant tussle in conceptually defining development. There are different models of development parse but it has been increasingly equated to economic development and wrongly paralleled to economic growth. In strictly economic terms, development has conventionally meant a sustained annual increase in GNP (or GDP) at rates that vary from 5 percent to 7 percent or more (Kapila, 2013). Till the 1960’s the term economic development was used as a synonym to economic growth; where the latter meant increase in per capita GNP in real terms (adjusted to inflation). According to the economic historian Kindleberger, “Whereas economic growth merely refers to a rise in output, economic development
Influence of inflation on growth velocity of the money explained due to the fact that buyers increase their purchases in order to protect themselves from the economic losses owing to the decrease in purchasing power of money. The coefficient of monetization The important indicator of status of money supply step forth the coefficient of monetization that is equal to: C=M2/GDP The coefficient of monetization permits to answer if there is enough money in circulation. It shows how much GDP provided with money (or how much money is there for $ GDP). In developed countries this coefficient come to 0,6 or even close to
Inflation is the rate at which the general level of prices for goods and services is rising, and, then purchasing power falling over a period of time. When price level rises, dollar buys fewer goods and services. Therefore, inflation results in loss of value of money. Inflation is divided into two categories Cost-push and Demand pull inflation: Cost-push inflation means that prices have been hiked up by increases in costs of any of the four factors of production such as (labor, capital, land or entrepreneurship) when companies are already running at maximum production capability. With higher production costs and productivity at it maximum, companies cannot maintain profits by producing the same amounts of goods and services.
Cost-push inflation happens when we face higher prices due to the increase in cost of production and higher costs of raw materials. It is determined by supply side factors. Cost-push inflation can be caused by higher price of commodities, imported inflation, higher wages, higher taxes and higher food prices (Economics Help, 2011). Demand-pull inflation happens when there is an increase in the price of goods and services when demand increases too much that it outpaces supply (US Economy, 2015). Sometimes people refer it as “too much money chasing too few goods”.
The Yinfl line on the graph represents the point that is greater than potential output. The increase in aggregate demand is caused by an increase in demand by consumers, firms, government, and foreign countries - leading to inflation. Inflation has consequences such as redistribution effects, uncertainty about the future economy by consumers and firms, menu cost, and may lead to export competitiveness, as well as, lead to inappropriate spending decisions known as money illusion. The last and most costly consequence of inflation is the significant impact that will occur with hyperinflation. Hyperinflation is caused by significant increase of inflation rates.
DISADVANTAGES Long term financial development puts an awful effect on the inhabitants of any nation. Long term economic developments may be identified with expansion, as inflations may increase. Inflations usually increase the cost of products on sale, and as the costs are higher, it will be an issue to the nationality in question to be able to buy their needs There is a limited amount of time involved in the growth of an economy as it involves an increase in GDP. The hypothesis and practice are both diverse. The hypothesis is the thing that economists are able to figure out for themselves; however, to be able to use the hypothesis in reality is the main task.