The growth of a nation is also dependent on the rate of employment. 4. Interest Rates: When inflation is high, the value of money goes down leading to the reduction in purchasing power. Increase in inflation also causes rates to increase, so the cost of the good changes and people will have to use more money for the same services and goods. 5.
Inflation is the increase in overall price level. There are two main type causes of inflation which is demand- pull inflation and also cost- pull inflation. Demand- pull inflation is caused by the persistent rise in aggregate demand. When aggregate demand is higher than the economy`s ability supply, overall price level in the market will rise. Therefore, inflation occurs.
Economic growth defined as increasing the capacity of an economy. It used to produce goods and service which compared from one period of time to another. Also, it measures the change of real national output in short period. Whereas, long term growth shown to increase the potential Gross Domestic Product (GDP). Thus, economic growth plays an important role in the entire nation.
Increased interest rates lead to inferior levels of capital investment. 3. The higher interest rates make domestic bonds more attractive, so the demand for domestic bonds rises and the demand for foreign bonds decreases. 4. The demand for domestic currency increases and the demand for foreign currency decreases, causing a rise in the exchange rate.
This leads to a drop in the number of items they produce. With a shift of the supply curve, the equilibrium changes from E1 to E2. On Figure 1 the equilibrium price increases while the quantity decreases. This indicates that the price of this luxury good has risen (P1→P2) due to an increase in production costs, especially resources and labour. Secondly, an increase in the number of wealthier people affected demand.
This is because FDI plays a key role in the fiscal development of countries. Firstly, inward FDI flows into the country leads to increase in the GDP (Gross Domestic Product) per capita in developing countries. According to Boghean (2015, p. 59), the FDI flow in developing countries was nearly 280 million US dollars in 2000 while GDP per capita was about 1.5 dollars, whereas in 2013 the FDI inflows expand up to 780 million US dollars which further expand the GDP per capita approximately 4.6 dollars. This evidence shows that FDI may be required for those countries who want financial development because there is a direct relationship between the FDI inflows into the country and the GDP per capita of the country. Because of the rise in inflow of FDI in developing countries, GDP per capita increases which further aid in the economic growth of these underdeveloped nations.
Demand pull inflation:- If demand is increasing faster than prices of supply products increases. This usually happens in that country which has high economy. 2. Cost pull inflation When prices of companies goes up they seek to increase the prices of products in order to maintain profit margins. Peoples always complains that prices are increase but they don’t realize that wages are also increasing.
This has meant that the value of the pound has increased. However this is like a cobweb with many downsides such as a rise in inflation as exports are a component of aggregate demand. In the long run, those countries with higher than average inflation see their exchange rate fall. When inflation is high, a country becomes less competitive in international markets causing a fall in exports (a demand for a currency) and a rise in imports (a supply of currency overseas). A fall in the exchange rate may be needed to restore a country's competitiveness in overseas markets.
To Reduce unemployment 4. To avoid large deficit on current account balance of payments Fiscal Policy The Fiscal Policy may be Expansionary or Deflationary. Currently the policy is expansionary. This involves increasing AD, therefore the government will increase spending and cut taxes. Lower taxes will increase consumers spending because they have more disposable income.
Let’s say if government decides to lower tax from the income, which is going to increase the income of the people, and give them greater purchasing power. And unless if it’s in a deflation/recession period, people to consume more goods and services, which will shift AD to right. As you see graph 1, assuming the country is producing in a full-employment level, the increase in consumption is going to shift AD2 is going to shift right to AD3, and cause inflation as there will be a bigger competition between the consumers to economy’s limited output/AS. And because of high competition, the price is going to rise drastically, P2 to P3, but cause output to rise only small bits, Y2 to Y3, because since it was already in a level of full employment, producers found it hard to hire more workers. As an example, if Korea decides to lower the tax, then Koreans are going to spend their income on consuming gold immediately instead of saving it.