Economic Principles Some of the most heated debates in macroeconomics in recent years have been concerned with the causes and consequences of inflation, the relationship between inflation and unemployment, and appropriate policy responses. Inflation and Unemployment in the AS-AD Model Inflation may be defined, for our purposes, as the proportionate increase in the price level per period of time. Another way of looking at inflation would be to point out that as the price level rises the real value of a given nominal amount of money falls, so that is to say that as the price level rises $1 will buy fewer and fewer goods. Thus, inflation might, alternatively, be defined as the proportionate decline in the purchasing power of a given nominal amount of money. In this sense, inflation is a monetary phenomenon. Therefore, Laidler and Parkin argue that its importance ‘stems from the pervasive role played by money in a modern economy’. Friedman goes further than this and argues that inflation ‘is always and everywhere a monetary phenomenon … and can be produced only by a more rapid increase in the quantity of money than in output. He clearly has views not only on what inflation is, but also on what causes it. By no means all economists agree with Friedman on the causes of inflation, and it is such issues, which are the focus of much of this chapter. There is also much disagreement about the consequences of inflation. Most would agree that a short bout of inflation, or a persistent but well-predicted one, would not be as harmful as a persistent and unpredictable bout of inflation. Even for the latter case there are those who argue that the consequences are not that serious, while others argue that unpredictable inflation distorts the mec...
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...lated by discounting the income, but to the permanent magnitudes. To take the extreme case as illustration: Wn is wealth possessed by an individual during his whole life’; and Yn is the average (permanent) lifetime income. This novel definition of terms is closely connected to Friedman’s research on the consumption function4, and it is very significant to his theory. Friedman applies his concept of permanent income to the theory of money demand, too. Permanent income is the return on a rather widely defined stock of nominal wealth. The latter consists of Money: a means of payment with a constant face value that does not yield interest; Bonds: interest bearing securities with a constant face value; Equalities: claims on the profits of a firm; Physical goods; and Human capital. Hence, Ln = f (P, rB, rE, P/ P, Yn p/r) (+) (-) (-) (-) (+)
Classical economist’s theory of monetary policy was thought to only affect prices and wouldn’t affect truly important factors such as employment. It was a major concern that if the government was to finance its’ spending only by increasing how much money was produced then it would have the same out come as expansionary monetary policy.
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.
Empirical literature examining the determinants of inflation has mostly viewed it as a monetary phenomenon. This viewpoint basically stems from Milton Friedman’s famous dictum that inflation is always and everywhere a monetary phenomenon. However, the conjecture of Friedman has recently come under attack. In fact, there appears to be virtually no correlation between money growth and inflation since the early 1980s. This leads to evolution of the argument known as Fiscal Theory of Price Level (FTPL). To capture the nonmonetary aspects of inflation, a number of economists investigate the main political, institutional and economic determinants of inflation across countries and over time. For instance, Aisen and Veiga (2006) conclude that political instability leads to higher inflation. Their study reveals that an additional government crises and a cabinet change which are used as proxy for measuring political instability raise inflation rate by 16.1% and 9.1% respectively. In another study, Aisen and Veiga (2008) extend their work to further analyze the effect of political instability, social polarization and the quality of institutions on inflation volatility. They argue that politically unstable and socially polarized countries with weak institutions are more exposed to political shocks that result in discontinuous monetary and fiscal policies which in turn result in higher inflation volatility. The intuition is that rising inflation instability creates frictions on market which reduces economic efficiency and causes the prevailing price in the economy to deviate from the price which would otherwise have been determined in presence of stable price level. They also provide evidence that greater independence of the Central Bank leads...
The economy starts at point U, and the government's decision, it hopes to reduce the level of unemployment, because it is too high. Therefore, the 5% decided to stimulate demand. Will soon start to lead to inflation in the demand for goods and services is growing, so in the increase of employment will soon be destroyed, people realize that, there is no real increase in demand. It is along the Phillips curve from u to V, companies began layoffs, the unemployment rate once again return to the W. next in the enterprise and consumers are ready, and expected inflation. If the government insist on trying again the economy will do the same thing (W to X to Y), but this time at a higher level of inflation. Any attempt to reduce inflation below the level at U will simply be inflationary. The rate U is the natural rate of unemployment.
using a price index measure a change in it. The basket of good has a
The problem with balancing an economy is that human judgment and evaluation of economic situations enter into the equation. Establishing a constant growth level in the money supply would eliminate the decision making process of the central banker. The problem with human intervention is the short-sided nature of many of the policies designed to aid the economy. Such interventions, which yields unintended negative consequences, is the result of the time inconsistency problem. This problem is understood through situations during which central bankers conduct monetary policy in a discretionary way and pursue expansionary policies that are attractive in the short-run, but lead to detrimental long-run outcomes. Friedman believes that by leaving money growth decisions to an individual, the results are poor long-run management and eventually high inflation rates, an obvious detriment to the economy.
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.
Inflation is one of the main reasons for the minimum wage being at a low level. In the United States workers are earning less than they did in the seventies. Last year in the United States approximately three million people of the working class dropped below the national poverty level. Minimum wage laws are established by the federal and state governments to help balance out the amounts of money people earn. It prevents one person or persons from making all the money, and some making very little. The term income distribution is where everyone would earn the same amount of money. This is not something that could really happen because everyone has different levels of education and different trades. Minimum wage is a way to try to keep the income distribution fairly equal. The views on raising the minimum wage are very different from person to person.
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
Paul A. Samuelson, one of the men who made Harvard’s reputation, made various contributions to modern economics. Samuelson brought numerous theories to the table, showing that math is an effective and necessary component of understanding economics. Furthermore, he discovered a new obstacle regarding inflation, known as “cost-push” inflation. But most importantly, Paul A. Samuelson has shown that economic theories can be timeless, however their implementation evolves around the current economic circumstances that are in play.
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.
Inflation refers to persistent increase in the price level over time and is one of the most dangerous threats to an economy because if unchecked it will erode the purchasing power of a currency and if the monetary system of the country is destroyed, can ultimateky force the indivduals to adopt foreign currency.
+ or - 1 % deviation ). The MPC are in control of interest rates, and
The economy in the United States was recently experiencing what is now called the Great Recession which occurred from December of 2007 to June of 2009. During this recession we experienced a decrease in our gross domestic product and experienced an increase to our unemployment. Since 2003 the American economy has been seen inflation rates as low as .1% in 2008 and as high as 4.1% in 2007. Rates such as these detail the increase and decrease in prices of products throughout the economy and has a considerable influence on the supply and demand of goods from cars to bread. In the past ten years inflation rates have continually seen positive values w...
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,