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.
Inflation occurs when consumers are spending like crazy, and “the central banks flood the system with too much money,” (DPE, 37). They do so through
In this section I will be discussing how inflation rates have increased over the past 40 years, and what effect this has had on monetary growth. Inflation rates are defined as the rate of change in price levels in our economy especially Canada. Surveys are conducted quarterly or monthly to determine and generate a Consumer Price Index. The CPI is conducted with a “basket of goods” to determine changes in consumer prices for Canadians. It is important to study and analyze the rate of inflation because it helps the government determine how the dollar value has changed over a period of time. Also to adjust pending contracts and initiate new pensions which have to take into account the effect of inflation. Less well-off people and elderly are more
Clark, Todd and Christian Garciga. "Recent Inflation Trends." Economic Trends (07482922), 14 Jan. 2016, pp. 5-11. EBSCOhost, cco.idm.oclc.org/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=112325646&site=ehost-live.
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.
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
Yes, it will increase inflation but create more job opportunities and unemployment will decrease if government intervention occurs. Yes in the long run this might be bad but people care about tomorrow more than they care about 3 or 4 years from now or even more. As Lord Keynes once said “in the long run we are all dead”.
The United States economy is racing ahead at dangerous speeds, and it may be too late to prevent the return of widespread inflation. Ideally the economy should move ahead gradually and grow at a steady manageable rate. Mae West once stated “Too much of a good thing can be wonderful” and it seems the U.S. Treasury Secretary agrees. The Secretary announced that due to our increasing surplus and booming economy, instead of having an outsized tax cut, we should use the surplus to further pay down the national debt. A tax cut, though most Americans would favor it initially, would prove counter productive. Cutting taxes would over stimulate an already raging economy, and enhance the possibilities of an increase in the rate of inflation. Paying off the national debt would actually help lower interest rates and boost investments, and therefore further increase the wealth of the population, while keeping inflation at bay.
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.
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?
Aho, Karen. "The price of Wal-Mart coming to town." MSN Money Central (2009): 3. Web. 8 Aug 2011. .
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:
...ies like this one have already been implemented mainly to reduce the overall budget deficit, rather than to reduce inflation.
Wall Street Journal 12 Feb 2009: p. A.13. SIRS Researcher. Web. 11 February 2010.
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.