As an economic advisor to the leadership of Bartvavia, I would not recommend attempting to adopt an expansionist fiscal policy aimed at reducing the already low unemployment. The reasons are: any reduction will only be short-run and not long-run, the interest rate will likely remain higher when unemployment returns to its natural rate and there are risks that the policy will only raise inflation which if uncontrolled can lead to stagflation and a recession. All these are because of the inverse relationship between unemployment and inflation.
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.
The International Monetary Fund summarizes the effects of inflation as distorting prices, eroding savings, discouraging investment, stimulating capital flight into foreign assets, precious metals, or unproductive real estate. Inflation inhibits growth, makes economic planning a nightmare, and, in its extreme form evokes social and political unrest. Authorities choose inflation targeting over alternative policy frameworks out of two reasons. First, achieving price stability - a low and steady inflation rate - is thought to be the major contribution that monetary policy can make to economic growth. Second, practical experience has demonstrated that short-term manipulation of monetary policy to achieve other goals like higher employment or enhanced output may conflict with price stability.
Fama (1981) reckoned that the elementary relationship between monetary policies and stock market is built by the changes of money supply through policies made by the government and this relationship is a negative one. Loosening Monetary Policy: The loosening monetary policy lessens the interest rate of the whole economy, the discount rate of stock and thus increases the expectation and income of buyers. An enlarged money supply will make an increase not only in goods consuming but also in financial assets buying, which includes stocks. When money supply increases, liquidity of stocks also rapidly goes with the same trend. However, Cooper (1974) and Nozar & Taylor (1988) asserted that there is no relation between the money supply and the stock index despite the loosening monetary policy.
They are influenced by monetary policy; when demand weakens, the fed lowers interest rates, which in turn stimulates the economy, by allowing the consumer to spend more and the industry to produce thus job retention is good. In contrast, continuous stimulus to increase salary or if demands falls, productivity will decrease, jobs are lost and this will push the economy's inflation higher. The Fed just tries to smooth out the bumps of natural business cycle. Inflation is an economy wide rise in prices which is bad because it makes it hard to tell if a business product price is going up because of higher demand or inflation. Inflation also adds premium to long-term interest rates.
The weak headline data captured an inventory correction, but, even so, real final sales grew a paltry +0.7%. The desire to cut inventory in Q1 is understandable, given the recent uptick in the inventory-to-sales ratio to its highest level since 2009. Headline GDP data in Q2 is expected to be more robust, but it is unlikely to be a game changer for the Fed. The FOMC is no longer attempting to achieve faster growth, as testified by its decision to pursue tapering. Has the Fed lowered long-term US growth expectations?
This inflation would result in an increase on the price of commodities. This recession should not be as bad as the recession of the 1920’s knows a, The Great Depression. Many problems are occurring because of the recession, unemployment rates are at their highest, inflation is on the rise, and the deficit needs to be reduced by fix international trade and finance within our government and industries. Due to the various economic turmoil’s of the past and present, the American government and its people need to implement new ways in which they can preserve money in these harsh economic times. America needs to stop being frivolous with its money because spending is not going to help it get out this huge deficit that it has put itself in.
Likewise, producers of raw materials will begin to feel the contraction of their market as firms respond to higher prices by reducing output, and so are unlikely to continue their price rises unless government accommodates the shocks they are causing. In conclusion, whether prices are driving up wages by demand-pull inflation or wages are driving up prices by cost-push inflation, the most sensible course of action for governments appears to be to maintain strict control over the money supply. Perhaps sometimes it might be preferable to relax monetary control slightly in order to increase employment, but the price for this will always be inflation.
Inflation can lead to unemployment, as people demand less due to higher prices and therefore demand for labor maybe decreased. Inflation also creates uncertainty for entrepreneurs, cost curves increase and revenue can decrease thus squeezing profits. Also when inflation is in the mind of the entrepreneur it can escalate easily as they will take inflationary actions like automatically increase prices and therefore it is imperative government spending/borrowing is controlled. Although government borrowing does increase the money supply, the monetarist view of a direct link between money supply and inflation is wrong, as proved when Britain experienced recession under Margaret Thatcher. In order to control the money supply the government cut borrowing and spending, which in theory would reduce the money supply, inflation and unemployment but interest rates had to rise to stop consumer borrowing, which in turn increased the exchange rate.
The additional income allows people to spend more causing more demand. Businesses may respond to this rising demand by raising prices because they know they cannot produce enough. In order to stop inflation, the central bank uses a restrictive monetary policy. This is where interest rates are raised and the bank sells its holdings of treasures and other bonds. The reduction in the money supply restricts liquidity and slows down economic growth.