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. 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... ... middle of paper ... ...ies like this one have already been implemented mainly to reduce the overall budget deficit, rather than to reduce inflation. Conclusively, all of the policies discussed have both advantageous and disadvantageous affects, and so there currently is no definite answer to the problem. Inflation can be reduced; however doing so would sacrifice the fragile recovery of the British economy. The government must therefore decide which process is more important for the long-term health of the British economy, and decide on the policies that will best improve either situation. Either way, living standards are set to fall, and real income will also decrease in the foreseeable future. Works Cited Sloman, J. Wride, A. (compiler) (2007). Economics. 7thedn. Harlow: Pearson Custom Publishing Collin, P. (2006). Dictionary of Economics. London: A&C Black publishers Ltd
There are a couple reasons why the aggregate-demand curve slopes downward. The first is the wealth effect. If the prices are higher, the money one has is worth less. It can be put into perspective by looking at it on a microeconomic level. For example, if you have a $20 bill, and the price for a ham sandwich rises from $5 to $10, you can only buy two sandwiches, rather than four. This shows that lower wealth leads to lower consumption, lower consumption leads to lower production, which means less workers will be need, leading to layoffs. The second reason is the interest-rate effect. As the prices rise, so do the interest rates. Higher interest rates hold down thing...
Before starting to explain inflation it is necessary first to define it. Inflation can be described as a positive rate of growth in the general price level of goods and services. It is measured as a percentage increase over time in a price index such as the GDP deflator or the Retail Price Index. The RPI is a basket of over six hundred different goods and services, weighted according to the percentage of how much household income they take up. There are two measurements of this: the headline rate (includes all the items in the basket) and the underlying rate (RPIX) which excludes mortgage interest payments. It is the RPIX which is used more often in this country, as a feature of the UK when compared to the rest of Europe is a very high proportion of owner/occupier homeowners. This means that many people have mortgages, and as such, changes in interest rates (to control inflation) can artificially raise the headline rate.
In May 1997, Tony Blair’s government gave the responsibility of looking after monetary policy to the Bank of England. It was therefore up to the Bank of England to try and achieve the government’s stated inflation targets. The original inflation target at that time was set at 2.5% for RPIX inflation. RPIX means that the inflation rates were being set on the retail price index whilst excluding mortgage interest payments. However, in 2004, the inflation rate was amended to a rat...
This paper will be a discussion of the current economic condition of the United States and this writer’s opinion on how it can be changed. Unemployment is high and needs to be reduced to full employment. We will explore the inflation rate, GDP growth and other factors of our current economic situation.
As the global economy struggles along, the recent decrease of value of the United States dollar also puts pressure on the United States to increase its inflation rate to the target 2%. There can be multiple ways of doing this, all which stem from the LM-IS curve. If one was to assume that the IS curve was elastic, a fiscal policy might be the solution to raise interest rates. If government were to cut back on taxes, or increase government spending, it would shift the IS curve to the right. This shift would create a new equilibrium point with the LM curve. This new point will have naturally increasing interest rates, which will help inflation, rise to the target point. It is up to government to decide on which fiscal policy would be most effective. However, if we cut taxes on consumers, one can expect that consumption would increase among consumers, and overall GDP would increase. Again, the Federal Reserve is looking to control the growth of the economy by raising Fed rates, so once can expect that once that natural inflation rate would need to increase before action is
Keynes said, “In the long run we are all dead”; this encapsulates the essence of Keynesian economics – focus on “short-run economic fluctuations” and the belief that it is aggregate demand that needs to be stimulated for economic growth. Keynesians believe that unemployment exists because of “an insufficient demand for goods and services”, and thus the solution to it is to prime aggregate demand (“Keynesian economics”). The recommended stimulus is government intervention, which, Keynesians believe, can “directly influence” aggregate demand by manipulating economic policies (Keynesian economics). Keynes’ suggested that the economy can exist in one of 3 ranges – horizontal, intermediate and vertical, determined by the aggregate su...
The recent global financial crisis that affected not only America but also Europe and other parts of the world resulted in massive unemployment. This is due to the high costs of operation that many corporations faced forcing them to cut on labor costs. There is need for European government interventions to avert this social crisis and prevent the occurrence of such a crisis in future. Unemployment has hit the service sector harder than other sectors with the following being the most affected: automotive, construction, tourism, finance and real estate. The global financial crisis has also increased consumer prices thus pushing inflation. According to McCathie, “the increase in July consumer prices to 1.7 per cent pushed inflation in the currency bloc up towards the European Central Bank’s target of keeping inflation at below, but close to 2 per cent. Eurozone consumer prices had stood at 1.4 per cent in June” (McCathie, 2010).
After the onset of the global economic recession in 2008, inflationary pressures were relieved. Slower economic growth and incomes growth lessened the ability of businesses to increase consumer prices, while also decreasing demand for labour and materials trimmed down inflationary pressures on business costs. By 2009, both headline and underlying inflation fell to the lower end of the Reserve Bank’s inflation target band between 2-3% where the Treasury forecasted inflation (CPI) to be 1.5% in 2008-09.
Nowadays, keeping the inflation and unemployment as low as possible are the two most important goals of the government as well as the Fed. Also, at the same time, the government and the Federal Reserve have to ensure that the country’s GDP increases at average of 3%. This can be achieved through the use of the fiscal and monetary policy. When used in the right manner or mix, these policies can stimulate the economy and slow it down when it heats up. The logic of this can be depicted by the Phillips curve that shows that expansion of wages in growing economies tends to more rapid than normal for a given period of time. A permanent balance between employment and inflation that often results in long-term prosperity can only be realized through implementation of the right policies.
By the beginning of the 1980s, double-digit rates of inflation had become so pervasive among industrialized economies that they were viewed as a major deterrent to global economic growth. Since then, an explicit policy goal of low inflation has become a mantra for policymakers, and many countries, such as the U.K., New Zealand, Australia, Japan, Sweden, and the eleven countries under the European Central Bank (ECB), have enacted fundamental reforms to achieve that goal. Specifically, they have made their central banks more independent and thus insulated them from the temptations of inflationary finance; furthermore, in most of these cases, as well as in the U.S., central banks have practiced a greater degree of openness or transparency about monetary policy decisionmaking to give the private sector a better opportunity to monitor their activities.
It is the role of every government to safeguard its people in all matters including controlling the economy. Every economy faces different challenges including the business cycles that may emanate from the global market. In this paper we try to examine measures taken by the UK’s coalition government in trying to ensure that the economy benefits every citizen and reduces the overall burden to it. We consider the recent comprehensive review on spending.
It is difficult for government to achieve all the macroeconomics objectives at the same time. Conflicts between macroeconomics objectives means a policy irritating aggregate demand may reduce unemployment in the short term but launch a period of higher inflation and exacerbate the current account of the balance of payments which can also dividend into main objectives and additional objectives (N. T. Macdonald,
The word inflation when brought forth, immediately can make the average American shriek. Inflation is defined by a sustained increase in the general level of prices for goods and services. With inflation being an everyday word in our world its hard not to wonder what the causes are for inflation. There are multiple factors that play a role in causing and contributing to inflation and the complications that come with it along with various ways to additionally overcome inflation.
The Article discussed inflation in the Philippines this year, its effect to the economy and how the country handle it over time. The analysis looks into the macroeconomic issues that affects economics. It focuses on the main points about inflation. This will cover how inflation are being measured, the effects on demand and supply and analyse the relationship of inflation to the Philippine economy.
It behaves like a subsidiary force that felicitates primary inflation forces such as cost-push inflation. It has an effect on the actual rate of inflation, as market sentiments have an effect on the economic stimulus that drives inflation. This is most felt when the anticipated prices of the commodities as perceived by the economic agents result in a constant rise in inflation. This is a result of the current actions that include hoarding or advanced buying of commodities, taken by the agents due to expectations of rising prices in the future.