The Meaning of Inflation

The Meaning of Inflation

There are four macroeconomic policy objectives that a government

pursues: high and stable economic growth, low unemployment, low

inflation, the avoidance of balance of payments deficits and excessive

exchange rate fluctuations. Some of these policy objectives may

conflict with each other depending on the priorities of the

government. A policy designed to accelerate the rate of economic

growth may result in a higher rate of inflation and balance of payment

deficit.

Throughout the fifties and sixties, rates of inflation were generally

low in the advanced industrialised economies. In the early seventies,

inflation rose dramatically. By the end of the decade, many

governments regarded inflation as the most pressing of their economic

problems. Then with the world recession of the early eighties

inflation began to fall, only to rise again with the boom of the late

eighties, but fell back with the recession of the early nineties.

Since then, inflation has stayed low in most countries.

Inflation is a general rise in prices throughout an economy. The

government aims to keep inflation low without affecting other policy

objectives. If they are unable to do this, the country will lose

international competitiveness, lower export and higher imports. If

inflation rises, the government will need to increase interest rates

to counteract. Raising the interest rates damages investments,

business confidence and employment.

Policies that a government may adopt depend on its order of priority.

If the government makes the fight against inflation as its major

short-term objective, it may be prepared to accept a lower ...

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...ing the euro is undoubtedly the loss of

sovereignty, reducing the governments’ ability to run the economy and

the set interest rate for the whole continent. The ultimate question

that will be endlessly discussed is: do the benefits of joining and

the costs of remaining outside of the euro outweigh the costs of

joining and the benefits of remaining outside?

Bibliography

Publications

Sloman, J (2003) Economics, London

Hornby, W Gammie, R & Walls, S (2001) Business Economics, London

Financial Times

Scotsman

Guardian

Times

Independent

Herald

Observer

Websites

www.ft.com

www.scotsman.com

www.guardian.co.uk

www.timesonline.co.uk

www.independent.co.uk

www.theherald.co.uk

www.observer.co.uk

www.singlecurrency.co.uk

www.euro.gov.uk