Previous studies have discussed the role of interest rates in determining house price. The majority of these papers identify interest rates as the most important explanatory variable. One early study is Abraham and Hendershott (1992). Using pooled cross-sectional data on metropolitan house prices in the US between 1977 and 1991, they find that macroeconomic factors including interest rates and employment are significant in influencing house prices. Iacoviello and Minetti (2003) argue that, over time, house prices became more sensitive to interest rate changes due to financial liberalisation in European countries including the UK.
Fisher hypothesized that there should be a long-run relationship in the adjustment of the nominal interest rate corresponding to changes in expected inflation. He postulated that the nominal interest rate consists of an expected“real” rate plus an expected inflation rate. The real rate of interest is determined largely by the time preference of economic agents and the return on the real investment. These factors are believed to be roughly constant over time, and therefore, a fully perceived change in the purchasing power of money should be accompanied by a one-for-one change in the nominal interest rate. (anonymous, long-run relation between interest rates and inflation,
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 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.
Let’s take the case of a bond market, the low cost of borrowing, induces the borrowers to supply more bonds – as a result bond prices decrease and since bond prices and interest rates have a negative relationship the interest rates rises. This phenomenon is popularly known as the FISHER EFFECT, named after Irving Fisher. The higher interest rates in turn causes the exchange rates to fall in the Foreign Exchange market, causing a currency appreciation. Clarida and Waldman (2008) in their paper “is bad news about inflation good news for the exchange rate” ; examined a minor sample comprising 10 advanced nations – Canada, Euro Zone, The Great Britain, Australia, Norway, Sweden, Japan, New Zealand, Switzerland and the United States – they analyzed the exchange rate volatility during the period lasting from five minutes prior to the announcement of an inflation to five minutes afterwards. They observed that on average, announcement of an unexpectedly high inflation does indeed lead the exchange rates to fall, i.e.
On this case inflation and economic growth are related terms with a common contention relationship, because there is a positive and important link and as well negative ones between inflation and economic growth. Thus, high inflation is extremely affect the economy in terms of bad performance, because high inflation cause a lot of issues such as it can decrease the purchasing power of the dollar and increase wages which will lead the numerous people’ income become less sufficient to them and cannot afford to satisfy their need and wants, and it cause transaction movement in the market become slow and shortage of necessity products and services, and when high inflation affect price level is giving a hard time, a very complicated situation that can make hardly to forecast future market behavior precisely. This condition is also lead up to business investment become slows. Basically high inflation gives a government, economist a hard time to dominate and standardize the inflation rate. And on the other hand, too low or decreasing inflation can also affect economy in term rate of employment and high output.
Inflation is also an ill for the growth of an economy. While looking at the relationship, the writers had to be also looking into other variables such as investment and capital formation of the economy. Throughout the study, the movement of inflation and economic growth, fact concrete conclusion is inverse relationship can be easily inferred. During the 1970s (in this period) inflation and economic growth had positive relationship, after this period the rates started to be high later the studies conclude it to be a negative relationship. Similarly, there is a structural breakeven point effect positive when inflation in 2%, breakeven when inflation rate equals 2% and negative when more than 2%.
If employers are paying employees more then they will raise costs to offset the added expenses. This will cause the buying power of the dollar to decrease, making it so people who received the minimum wage increases will not be making any more money than they otherwise would’ve, and people who did not have their pay increased, will be making even less money then they had used too. This would do nothing but increase the poverty rate even higher, doing exactly the opposite of what the counter argument says it would. The second way this counterclaim is disproven, is because of the increase people will see in the cost of living. With the price of housing, food, etc.
The third cause is expectations of future prices. When firms are making price decision, their expectations may affect their current decisions. The last cause of inflation is the growth of money which means that MS may also play a role in creating a sustained inflation. Furthermore, the general advantages of inflation includes it focuses monetary policy directly on achieving the goal of low and stable inflation. Monetary
Mork (1989) decomposed oil price changes in real price increases and decreases for the examination of asymmetric response to oil price changes. The analysis showed asymmetric effect. Asymmetric effect implies that oil price increase has a clearly different effect from the