Inflation and Economic Growth: The Effects of Inflation on Economic Growth Aboki Gazali Usman Master of Business Administration, Faculty of Business and Accounting Infrastructure University Kuala Lumpur IUKL 1.0 Abstract: In the form of economic, Inflation is refers to rate or percentage which indicate the level increase in price of goods. This means inflation is commonly refers in the rising in price levels of product and services or could be in the money supply rising, basically, inflation occurs more in prices than other standards, thus If the money supply has been money supply been raised up this shall clearly explain price level. Today many countries in this world are suffering because of slowed economy growth that lead to unstable
The Quantity theory of money states the direct relationship which exists between money supply and prices in the economy. It says that as money supply in the economy changes, price changes in the same direction too. That is if money supply increases, consumers will have more money in hand to spend, thereby demanding the more goods and services which shifts the demand curve to the left, keeping supply constant leading to a rise in the price level. In similar context when money supply falls, the price level decreases too. The Quantity theory of money is represented by the following equation: MV = PT M = Money supply V = Velocity of Circulation P = Price Levels T = Transactions T represents the total no.
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.
David Hume and Adam Smith have both laid down essential monetary theories that form the basis of macroeconomics today. The quantity theory of money and the labour theory of value explained to humans how money affects us in our daily lives. Most people do not ponder over this in detail, but thanks to Hume and Smith, we can learn more about money’s role in economics by reading their essays (of money) and book (Wealth of Nations), respectively. According to David Hume, money is not a subject of commerce. It is just an instrument of commerce that enables people to exchange one good for another and produce more wealth.
Possibility of hot money flow. High interest rates might be attractive enough for foreign investors and increase their incentives to save in UK, this way demand for £ will increase and cause appreciation of currency. Appreciation as a result will make exports less attractive and less competitive on global market; likewise, imports consumption might rise, as they will be more attractive domestically. Although, this is likely to have minimal impact due to recent depreciation of the currency and strong global expansion All of those changes result in falling aggregate demand (AD) (which consists of Consumption, Investment, Government Spending and Net Exports), as investment, consumption and net exports all will be reduced. Following diagram will help understand how this affects economy.
Therefore, macroeconomics focus on matters relating to inflation, price level, importation, exportation, and the rate of unemployment in a country and how these elements affect the general economy (OpenStax, 2014). In a nutshell, micro economics deal with some aspect of the economy while macroeconomics
The demand curve in the classical theory, focuses on the need for funding for investment purposes or consumption of resources by consumers and producers. Similarly the demand of money is based on the needs for funding. Keynes states that there are three combination of motives behind the public's desire to hold liquid cash. Firstly, the transaction motive, which relates to the demand of monies for current transactions and business exchanges. Secondly, the precautionary motive.
Inflation is the change in the level of prices in the market. In Figure 1.10 the inflation rate is shown below, the black line is displayed as the percentage rate of increase in the consumer price between the years 1960–2012. In the early 1960’s the inflation rate was low, it began to increase in the late 1960’s. Inflation is very expensive; however, it is certainly useful to understand the causes, one main cause of inflation is that when demand increases excessively, the price will be increased by producers to gain higher profit margins and the sudden shift in cost, will cause inflation, this is known as demand-pull inflation. Another cause for inflation is known as cost-push inflation this occurs when firms respond to rising costs, by increasing prices to protect their profit margins.
The impact of taxes and public spending on economic growth has become a subject of much discussion and debate among economists. This is partly because there are many theories regarding what propels and facilitates economic growth: while some favour the Keynesian demand side factors, others Neo-classical supply side factors, while yet others consider a mixture of the two or another theory altogether. However, the world economy is sufficiently large and complex enough so that any theory can find some support in the data. By implementing changes in tax rates and public spending, the government can influence the economy, through what is popularly known as fiscal policy. There are strong proponents as well as opponents for cutting taxes and public spending.
The supply of money is a multiple of monetary base which includes domestic credit and the country’s foreign exchange reserves. 3. The demand for nominal money balances is a positive function of nominal income. 4. The theory Purchasing Power Parity-The law of one price’ holds for identical goods sold in different countries, after allowing for transport costs.