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Macroeconomics Essay

1546 words - 6 pages

(iii) Rate of USA inflationInflation can be define as an increase in the price of goods and services which is representative of the economy as a whole. Inflation frequently related with increasing in price of goods and services by the particular time period. Graph 3 shows the rate of USA inflation.Graph 3According to the annual rate of US, it began on 2003 was at 1.9% increase in 3.3% on 2004 and rose again 3.4% on 2005 and bottoming about 2.5% on 2006 before steadily climbing again to 4.1% on 2007. On 2008 the annual rate falling drastically to 0.1% before rise to 2.7% on 2009, again a downtrend at 1.5% on 2010 and slowly increase to 3.0% on 2011 and again on 2012 it decrease to 1.7% and on 2013 the rate annual decrease to 1.5%.Inflation could be categorized into demand pull-inflation, cost push inflation, profit inflation and currency inflation.Demand pull inflation is inflation which occur consequence of the rise in aggregate demand (AD).Cost-push inflation is an inflation that occur due to high increase in the cost of production, which caused by increase in the cost of production factorProfit inflation is caused by greedy producers hide the stockpile to get the higher profit.Currency inflation is caused by no control in money supply.To control inflation, the Federal Reserve plays an important role by avoiding recession. This could be done by using Monetary Policy to influence its nation economy. Using its monetary authority to control the supply and availability of money, a government attempts to influence the overall level of economic activity in line with its political objectives.The Federal Reserve has several tools it traditionally uses to implement contractionary monetary policy if it suspects inflation is getting out of hand by raise the Reserve requirement. The amount of banks must keep on reserve at the end of each day. Raising this reserve keeps money out of circulation. Second, the Federal Reserve could raise the discount rate. This is the interest rate the Fed itself charges to allow banks to borrow funds from the Federal Reserve's discount window.Besides that, the most important tool the Federal Reserve has to control inflation is to manage the public's expectations. Once people anticipate inflation, they create a self-fulfilling prophecy. They plan for future prices increases by buying more now, thus driving up inflation even more. It raised rates to combat inflation, then lowered them to avoid recession. This volatility convinced businesses to keep their prices high.(i) GDP (Economic Growth)Gross Domestic Product (GDP) is the total value of output (goods and services) produced by the factor of production located within the country's boundary in a year. The factor of production may be owned by any one-citizens or foreigners. Economic growth is often measured as the rate of change of GDP. Negative growth is associated with economic recession and economic depression. So, the governments try to achieve high rates of economic growth...

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