Inflation
INFLATION CAN OUR ECONOMY GROW WITHOUT IT?
INFLATION CAN OUR ECONOMY GROW WITHOUT IT? What is inflation? The definition of inflation, according to Webster’s Revised Unabridged Dictionary, is “an undue expansion or increase, from overissue.” Although, Webster’s is considered by most to be the overall best dictionary, WordNet states the meaning of inflation a lot clearer by saying, “it’s a general and progressive increase in prices.” It occurs when the value of goods rises faster than the value of money. The usual approximate measure of this is the Consumer Price Index, which weigh the prices of different goods according to importance in a typical budget and then shows how much the prices of these goods have increased. This immediately raises some problems; for example, the weight of the goods must change over time. The importance of computers was not measured in the price index 100 years ago. Another problem is the failure of the price index to capture changes in quality. The quality of a good may have improved by 20%, while the price has only risen by 10%. The consumer price index doesn’t feel this should be a factor, but many would disagree. Hence, inflation is not easy to define in practice. This should be kept in mind when discussing how to defeat inflation. There have been numerous theories on how to defeat inflation and even some theories on whether, or not, it should be defeated at all. Some say that inflation is not only expected, but often, needed. Economists believe that in order for the economy to expand and grow, there has to be some level of inflation.
Therefore, the opposite holds true as well. If you want to lower inflation, you have to accept a semi-standard economy. They call this tradeoff the Phillips Curve. The Phillips Curve is thought to be the “proper” way of balancing economic growth and inflation. For this reason the Federal Reserve is always looking for the perfect equilibrium at which we can maximize our economic growth while keeping inflation as minimal as possible. They do this by increasing and decreasing interest rates. Although, Economists and the Federal Reserve abide by the Phillips Curve as a general rule for not letting inflation get out of hand, it has been proven many times in the past that it is possible to have a very healthy and prosperous economy without raising inflation at all. There are even exa...
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...creased. This would show a truer relation of the prices of goods to the inflation of the economy. I can see the Federal Reserves reasoning behind raising interest rates to slow down the economy and lower inflation, but they need to realize that the rate of inflation is not completely dependant upon the rise and fall of the economies well-being. The past has proven to us numerous times that the economy is quite capable of being stable and prosperous without effecting the inflation rate in a negative way. That’s why I feel that it would be in the nations best interest to continue letting the economy expand into bigger and better things without raising interest rates to unneeded proportions.
WORKS CITED
Forbes, Steve. “Bad Idea Begets Bad Economy.” Forbes. Oct. 9, 1995: p23.
Dentzer, Susan. “Honey, I Shrunk the Price Tag.” U.S. News & World Report. Sept. 23, 1996: p72.
Forbes, Steve. “Stop Stunting Our Prosperity.” Forbes. Oct. 16, 1995: p27. “Inflation.” Hypertext Webster Gateway. Jan. 20, 1999: internet. http://work.ucsd.edu:5141/cgi-bin/http_webster?inflation
Bootle, Roger. “Chapter 2-Prices.” The Death of Inflation. Nicholas Brealey Publishing. 1996: p488-489.
But as we know, there is always going to be one or the other. The reason that an economy is thrown out of equilibrium in the first place is a result of consumer spending habits. If these habits are changed, there is a result is one of two things. If consumers increase there spending habits, an inflationary gap occurs. At the opposite end of the spectrum, if consumers were to reduce their spending, the result is a recessionary gap. Inflation occurs when the economy is growing uncontrollably fast as a result of consumer spending. This rapid rate of inflation happens when consumers are spending money due to increases in income. When consumers spend more, this increases the overall price level, which therefore leads to a further increase in income. This cycle is what leads to over-inflation. One of two things can be done when an economy is experiencing an economic gap, whether it is above or below the trend line. Option one is to do nothing about it and let the problem work itself out. The problem with this method is that in order for a recession to work itself out without government assistance, this requires that workers take pay cuts – something that a very low percentage of people are accepting of simply due to the personal
If inflation rate is high the base rate might increase and more people will decide to save money than spend which could decrease demand and retailers decide not to increase prices so inflation rate slowly goes. My view of
The adaptive expectations theory assumes people form their expectations on future inflation on the basis of previous and present inflation rates and only gradually change their expectations as experience unfolds. In this theory, there is a short-run tradeoff between inflation and unemployment which does not exist in the long-run. Any attempt to reduce the unemployment rate blow the natural rate sets in motion forces which destabilize the Phillips Curve and shift it rightward.
Reviewing the articles assigned, Hoskins and Aiyagari provide their stance on a zero inflation objective to achieve price stability and refer to one another’s viewpoints. Hoskins is an advocate while Aiyagari is not. Hoskins’ stance is based on three main reasons: the Central Bank has control over the price level of goods and services over time but no control over the growth of output, if the commitment by the Central Bank is seen as credible it can promote economic efficiency and growth, and zero inflation is better than inflation rate stability. The article is a mix of his viewpoints and response to critics, such as Aiyagari. Both provide decent arguments; however, I tend to find Aiyagari’ s more convincing overall as his arguments seemed more logical and factually based. Hoskins’ refutes did not seem terribly substantiated or
Many programs that were created during The Great Depression are beginning to haunt our governmental institution even today. Programs such as Social Security and the Welfare systems are creating a substantial amount of debt within our country. According to the article titled “Perils of Price Deflations,” “Two decades ago, worrying about deflation was like worrying about a shortage of pigeons in Trafalgar Square. But now that inflation rates are near zero, periodic deflations are much more plausible” (Carlstrom 1). Deflation has many negative effects. Within Charles Calstrom’s article he names three “dangers of deflation” (1). The first is nominal interest rates. These cannot fall below zero percent and therefore, deflations can increase real interest rates. These high rates discourage investment spending and decrease economic activity. The second is that employers are unable to reduce nominal wages so deflations increase the real wage discouraging employment growth. The last is that these effects can lead to large redistributions of wealth” (Carlstrom 1). In an ideal economy supply equals demand in both work and goods, however, especially in times of economic difficulty this ratio becomes very skewed. Thus resulting in high prices of goods. Often the most negative effect is the redistribution of wealth that follows deflation. “Shocks that
The steady growth of inflation in 2007 and 2008 suggest that the Federal Reserve applied discretionary powers to avoid tightening. Tightening is inflation growing too fast. In 2009 the feds needed to be concerned about the deflation because the average inflation rate dropped to -.4%. Inflation tends to follow movements and they are closely related to the business cyc...
...h. According to the Classicists, attempting discretionary demand-side stabilization by changing G, M, or tax rates would only change the rate of inflation. There is no role for fiscal and monetary stabilization in an economy by a vertical AS curve.
The idea of the money growth rule is contingent upon the relationship between the money supply and inflation. Therefore, the question arises whether there even is a relationship between money supply and inflation. As stated earlier, one can see a relation between money and inflation. Presented above is series data that displays this relationship between money supply and the inflation rate over the previous decades. The problem is that there are fluctuations within the data and therefore a broader definition of the money supply must be utilized. Based on the research of Dr. Terry J. Fitzgerald, an economist at the Cleveland Federal Reserve Bank, if one defines money supply as M2, when examining the data over a multiple year progression, a pattern begins to present itself. Further, by graphing the difference between adjusted money growth and inflation, the link becomes evident. These graphs show the weight that changes to the money supply can have upon an economy’s inflation rate.
Inflation; ‘a situation in which prices rise in order to keep up with increased production costs… result[ing] [in] the purchasing power of money fall[ing]’ (Collin:101) is quickly becoming a problem for the government of the United Kingdom in these post-recession years. The economic recovery, essential to the wellbeing of the British economy, may be in jeopardy as inflation continues to rise, reducing the purchasing power of the public. This, in turn, reduces demand for goods and services, and could potentially plummet the UK back into recession. This essay discusses the causes of inflation, policy options available to the UK government and the Bank of England (the central bank of the UK responsible for monetary policy), and the effects they may potentially have on the UK recovery.
I disagree with this statement. I don’t think that inflation is always bad for the economy, because inflation can in time lead to deflation. An example of the effect of inflation would be consumers spending less money when prices are constantly rising, because they would rather buy the items now and spend less money than purchasing them in the future. Even though deflation is normally considered a negative thing, it’s not always bad either. Good inflation is something that happens when companies can manufacture good at lower cost without losing revenue or raising unemployment. One way that the government can increase deflation is by putting more money into supply by purchasing securities. In the end, both inflation and deflation are both parts
The chain of fundamental thoughts behind this conviction takes after: as more individuals work the national yield expands, bringing about wages to build, creating purchasers to have more cash and to spend additionally, bringing about shoppers requesting more products and administrations, at long last bringing on the costs of merchandise and administrations to increment. At the end of the day, Phillips demonstrated that unemployment and inflation imparted a converse relationship: inflation climbed as unemployment fell, and inflation fell as unemployment rose. Since two noteworthy objectives for financial approach creators are to keep both inflation and unemployment low, Phillip 's disclosure was an imperative reasonable achievement, additionally represented a troublesome test: how to keep both unemployment and inflation low, when bringing down one results in raising the other?
Today, our nation is in a recession. Nobody can deny that. No politician, no Wall Street financier, no journalist, can say otherwise. The discrepancies lie with the principle method of economic response to this crisis. Some politicians point out the unemployment rate and call down the powers of Congress to decrease it. Others still look to the devious inflation percentage that lurks behind, as a shadow, ready to cut purchasing power and increase prices. Unfortunately, as the Phillips curve warns us, the two are irreconcilable. Lower inflation invites higher unemployment, and increasing employment beckons heightened prices. The discrepancies lie with the classic battle between controlling inflation and unemployment. Though it may be the less popular choice, politicians should concentrate on curbing inflation as it has a great impact on our economy and is a more accurate indicator of economic stability.
Measures of the cost of living, like the retail price index (RPI), are inadequate, failing to reflect fully the impact of technological advances on our standard of living. This leads to a substantial upward bias in our estimates of inflation, perhaps as much as 1.6% a year. That is the contention of Professor William Nordhaus of Yale University. If he is right, then we may have to rewrite history:
Inflation is the rate at which the purchasing power of currency is falling, consequently, the general level of prices for goods and services is rising. Central banks endeavor to point of confinement inflation, and maintain a strategic distance from collapse i.e. deflation, with a specific end goal to keep the economy running smoothly.
As a result of this economic growth families will begin to feel more confident and will begin to spend more of their money instead of saving it because they believe that will receive a pay raise or will find a better job. (Amadeo, 2016) Borrowing also increases when economic activity is high people begin to borrow from banks and other places because they feel that the government has been doing a great job managing the economy. (Amadeo, 2016) As we have seen in 2008 people should never get to confident in the economy because our economic bubbles are used to crashing when they are doing very well and it’s never really the people’s fault it’s the governments. Although inflation begins to rise when the economy is doing great one of the things that is known to bring prices down is competition among businesses. Competition is great because one company will attempt to sell a product for a cheaper price than another company which results in lower prices the same as you see with cell phones and automobiles. Higher prices can also be caused by technological innovations when people are expecting a new product the producer can sell it for a higher price because they know that consumers will spend almost any amont of money to obtain that product. (Amadeo, 2016) Higher demand for new products will increase employment to meet those demands and inflation will rise which will benefit the economy tremendously. Whenever the price level increases, spending must also increase to be able to buy the same amount of goods and