Inflation Targeting

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.

Exchange Rates: It is the value of money of a country prevailing in other countries. Due to high inflation, the exchange rate gets fluctuated which in turn affects trades (import and export), transaction across border and also value of money gets affected. 3. Unemployment: If inflation is high, the unemployment rate is low. The growth of a nation is also dependent on the rate of employment.

However, although inflation is a useful measure for the government, as they can see how the general price level affects other economic factors, it still is considered to be a problem. The higher the rate of inflation the greater the economic cost is what economists see and the reasons for this follow. Stable prices give the consumer a general idea of what a fair price is for a product and which suppliers charge the least for them. With inflation being high, both... ... middle of paper ... ...vernment are uncertain what the rate of inflation will be in the future. When planning they therefore has to estimate as best they can the expected rate of inflation.

In the first case, a rise in aggregate demand could lead to inflation. This kind of inflation is referred to as demand-pull inflation. An initial increase in the level of aggregate demand could be caused, for example, by a rise in government spending. This would cause the aggregate demand schedule to shift to the right, and the short-run equilibrium point would move upwards and to the right along the short-run aggregate supply curve. This would lead to a rise in prices as well as an expansion in GDP.

The diagram below tracks the effect of this. We see aggregate demand rising but the economy finds it difficult to raise (expand) production. There is a small increase in real national output, but the main effect is to put upward pressure on the general price level. Shortages of resources will lead to a general rise in costs and prices. Impact of a change in aggregate supply Suppose that increased efficiency and productivity together with lower input costs (e.g.

In a healthy economy, the increase in inflation probably points to higher interest rates, this will favor the currency under discussion, in this case, the dollar. However, many factors determine exchange rates, and all are related to the commercial relationship between countries. The general concept behind a trade-weighted currency index is to offer a general measure of the relative performance of a nation's currency, based on the part currencies weighted by the trade volume among the countries involved. The weighted trade index most often of the US dollar is the FRB Core Currency Index. The current series of the Federal Reserve was introduced at the end of 1998 to handle two circumstances.

Toshiyuki Kimbara Economics 335 Currency Values and Exchange Rates There are several key factors that causes currency values to change and they are: Gross Domestic Product (GDP), inflation, the balance of payment and trade, public debt, and interest rates. The GDP measures a country’s economy since it calculates the total market value of all goods and services. When the GDP of a country increases, the national currency will rise up as well. Inflation measures the rate where the general level of prices for goods and services are increasing while the purchasing power is decreasing. Countries with low inflation rates will have a higher currency since there is an increase in purchasing power., but high inflation will decrease the value of the currency.

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.

In this model he taught the real effect generate due to growth of money supply .Another important aspect of relationshi... ... middle of paper ... ...cy could be depreciated because export should be increases on that country while other country is on appreciating position they will pay lesser currency rate while import any commodities. Finally, professor Prest considering the effect of price inflation, he concluded indicators of excess public revenue over expenditureare both relatively to the GNPhe told that if the income of the people will raise they will also facing the price inflation because higher the income pays higher incometax, no matter whether the increase in income is real or not. On the other side of expenditure, if cost of the state is raising, people wanted to make heavy demand on the social services so the relative price effect are depending upon the inflation rate . For instance if the rise in money wages and the share of total wages cost rise then its pushes up the inflation in the public sector.

What is inflation expectation? Inflation Expectation is a concept that talks about the notions that workers, businesses and investors have about the prevalent inflation rates in the market and how their decision-making will be affected in the future due to their perceived rates of inflation. 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.