Inflation defines as an increase in the price you pay or a decline in the purchasing power of money. In other words, price inflation is when prices get higher or it takes more money to buy the same item. Interest rates are increased to moderate demand and inflation and they are reduced to stimulate demand.
Monetary policy aims to influence the overall level of monetary demand in the economy so that it grows broadly in line with the economy's ability to produce goods and services. This stops output rising too quickly or slowly. If rates are set too low, this may encourage the build-up of inflationary pressure; if they are set too high, demand will be lower than necessary to control inflation. Changes in demand and output then impact on the labor market - employment levels and wage costs - which in turn influence producer and consumer prices. When the Fed increases the discount rate, it does not have an immediate impact on the stock market. Changes in the official Bank rate then affect the whole range of interest rates set by commercial banks, building societies and other financial institutions for their own savers and borrowers. It will influence interest rates charged for overdrafts and mortgages, as well as savings accounts. A change in the official Bank rate will also tend to affect the price of financial assets such as bonds and shares, and the exchange rate. These changes in financial markets affect consumer and business demand and in turn output. Changes in the official Bank rate take time to have their full impact on the economy and inflation. Some influences, such as those on the exchange rate, work very quickly.
In January of 2003, Oil price spiked up 76.82% from the previous January. These have recently been some speculation on the correlation between a sharp rise in Oil price
and a sharp fall in Stock prices. The way the theory goes is that a sharp increase in oil prices on the magnitude of 50% to 100% annual increase has historically resulted in a sharp decline in the stock market price.
Monetary Policy is another policy used in Keynesianism which is a list of protocols designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system, also known as the central banking system in the U.S., which holds control of this policy. Monetary policy has three tools used by the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rate a bank will charge.
Currently, the most important factor in the rise of gas prices is the increasing cost of crude oil. Unfortunately, the United States has three percent of the world’s oil reserves. (Horsley) In 2009, the United States was third in crude oil production as well as the world’s largest petroleum consumer. (e. I. Administration) Such consumption required and still requires the United States to import petroleum/crude oil from other countries.
In 2004, crude oil producers around the world expected a 1.5% growth in the world’s demand for crude oil. The actual growth rate was more than double the projections at 3.3%. This growth was due to rapidly industrializing of foreign countries such as, China and India. Therefore the lack of crude oil affected the supply of gasoline to consumers at the pump.
Monetary Policy involves using interest rates or changes to money supply to influence the levels of consumer spending and Aggregate Demand.
Another key cause to the price inflation issue is the extended period of bitterly cold weather that loomed in the northern and midwestern parts of the U.S. throughout the winter months. This led to an “increased demand in home heating oil, which is widely used in the region and is virtually identical to diesel fuel” (Lang1). This increased demand for fuel coupled with the restrictions on exported oil allowed OPEC to jack up their prices an exorbitant amount in a relatively short period of time.
Economist has analyzed the causes of decline in world oil prices. Typically, the price of oil is determined by demand and supply of the world market and forecast advance to invest in which level of demand depends on the level of economic activity and behavioral use of energy from humans. The oil price decline has a benefit for oil importers like China, India, Japan, Europe but unfortunately for oil exporters such as: Kuwait, Venezuela, Nigeria, and Iraq. Crude oil prices fell steadily in the past seems to be a result of two main factors being the levels of demand declining and a level of increased supplies (Economic, 2015)
The U.S dependency on foreign oil presents many negative impacts on the nation’s economy. The cost for crude oil represents about 36% of the U.S balance of payment deficit. (Wright, R. T., & Boorse, D. F. 2011). This does not affect directly the price of gas being paid by consumers, but the money paid circulates in the country’s economy and affects areas such as; the job market and production facilities. (Wright, R. T., & Boorse, D. F. 2011). In addition to the rise in prices, another negative aspect of the U.S dependency on foreign crude oil is the risk of supply disruptions caused by political instability of the Middle East. According to Rebecca Lefton and Daniel J. Weiss in the Article “Oil Dependence Is a Dangerous Habit” in 2010, the U.S imported 4 million barrels of oil a day or 1.5 billion barrels per year from “dangerous or unstable” countries. The prices in which these barrels are being purchased at are still very high, and often lead to conflict between the U.S and Middle Eastern countries. Lefton and Weiss also add that the U.S reliance on oil from countries ...
Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) taking up measures to regulate the supply of money and the rates of interest. It involves controlling money in the economy to promote economic growth and stability by creating relatively stable prices and low unemployment. A monetary policy mainly deals with the supply of money, availability of money, cost of money and the rate of interest to attain a set of objectives aiming towards growth and stability of the economy. Here are some of the monetary policy tools:
In an economy, aggregate demand (AD) accounts for the total expenditure on goods and services. It has five constituents; Consumer expenditure (C), Investment expenditure (I), Government expenditure (G), Export expenditure (X) and import expenditure (M), This gives us: AD= C+I+G+X-M. Aggregate supply (AS) on the other hand is the total supply of goods and services in the economy. Increasing AD and decreasing AS both cause demand-pull and cost-push inflation respectively. Demand pull inflation occurs when aggregate demand (AD) continuously rises, detailed in Figure 1. The AD curve continuously shifts to the right, as demand continuously increases, from point a to b to c. This consequently causes an increase in the price level of goods and services. As prices rise, costs of production also increase, causing producers to reduce output (a decrease in aggregate supply (AS)), shifting the AS curve to the left and leading to yet another increase in prices, (t...
The first major aspect of the monetary policy by the Federal Reserve is its interest rate policy. This interest rate policy is mainly determined by the figure for the federal funds rate, which is the rate at which commercial banks with balances held within the Federal Reserve can borrow from each other overnight in ord...
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
According to federalreserveeducation.org, the term "monetary policy" refers to what the Federal Reserve, the nation 's central bank, does to influence the amount of money and credit in the U.S. economy, (n d). The tools used are diverse but the main ones are:
Inflation is defined as an increase in the expected price level and has been the signal for an improving economy, but it has also weakened an economy due to the unemployment it usually produces which usually hurts the Middle class the most. A healthy rate of inflation means an expanding economy due to higher tax revenues for the government and higher wages for businesses that are booming due to the high demand of their products. But if inflation surpasses of what is expected than employer will have to reduce wages to meet these new prices. When the Federal Reserve creates inflation most argue that this is robbing people of the money that they have saved because they have to use it due to the rise in prices. Printing
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.
Inflation is one of the most important economic issues in the world. It can be defined as the price of goods and services rising over monthly or yearly. Inflation leads to a decline in the value of money, it means that we cannot buy something at a price that same as before. This situation will increase our cost of living.