(Prasodjo) Answer 3) As we haev alread... ... middle of paper ... ...DP and Unemployment Levels. The AS-AD model shows a negative relationship between level of inflation and unemployment. In other words, with supply shocks because of rise in oil prices, a fall in GDP rate is experienced and this increases the unemployment rates. So higher prices of oil will not only lead to high inflation but also high unemployment and reduced economic growth. This same effect is shown in the Philips Curve.
I have looked at a range of aspects involved with inflation and what the costs to the economy are when the scenarios are different, hyperinflation, sustained low inflation etc. and I conclude that inflation will always have some costs if it is both high and low, but higher inflation, which could lead to hyperinflation has more costs to the economy and therefore causes a greater economic problem.
Thirdly, the prices of raw material also will influenced the inflation. For example, if the key inputs such as increase in the price oil, producers have to adjust the output supply or increase the price of the outputs in the market in order to overcome and cope with the rising price oil. When output decline and the price of the output rise, the cost push inflation occurs. Moreover, if the firms become less productive, it allows costs to rise and invariably leads to higher prices. This is because firm used a lot of time to produce the products.
Demand-pull inflation is caused by an increase in demand or in the supply of money. This increased demand allows producers to charge higher prices. A lot can be learnt from this economic indicator. High levels of inflation indicate an unp... ... middle of paper ... ...zon. (Mishkin F, 2000) Inflation Targeting makes inflation (rather than output or unemployment) the primary goal of monetary policy.
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.
A large number of researchers proposed that exchange rate volatility and oil price fluctuations have considerable consequences on real economic activities. The impact of oil price fluctuation is expected to be different between in oil exporting and in oil importing countries. An oil price increase should be considered as bad news for oil importing countries and good news for oil exporting countries, while the reverse should be expected when the oil price decreases. Through demand and supply transmission mechanism, oil prices impacts the real economic activity. The supply side effects are associated with the fact that crude oil is a basic input to production, and an increase in oil price leads to a rise in production costs ultimately that result in firms’ lower output.
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.
A large number of researchers proposed that exchange rate volatility and oil price fluctuations have considerable consequences on real economic activities. The impact of oil price fluctuation is expected to be different between in oil exporting and in oil importing countries. An oil price increase should be considered as bad news for oil importing countries and good news for oil exporting countries, while the reverse should be expected when the oil price decreases. Through demand and supply transmission mechanism, oil prices impacts the real economic activity. The supply side effects are associated with the fact that crude oil is a basic input to production, and an increase in oil price leads to a rise in production costs ultimately that result in firms’ lower output.
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.
In aggregate demand, Bjørnland (2008) explains the manner in which the increase in oil prices results in the reduction of consumers’ purchasing power thereby reducing expenditures on products and services. In particular, Guidi (2010) indicates that an increase in the oil price has a negative impact on output through the reduced consumption of products that are durable. In the last place, Ushie, Adeniyi and Akongwale (2012) explain that in terms of the interest rate structure, the transmission mechanism comes through the systematic response to monetary policy. A positive shock on the price of oil has the tendency of raising the inflationary expectations of the public, steepening treasury securities’ yield curve, pressuring the rise of the target for governments’ fund rate and ultimately slowing down the economic growth. Economic fluctuations are therefore not seen as resulting directly from oil price shocks.