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
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 rate of
economic growth and a higher level of unemployment.
There are two elements of anti-inflation policies; demand-side
policies which are designed to affect aggregate demand and supply-side
policies which are designed to affect aggregate supply.
A demand-side policy contains two types; Fiscal policy involves
altering government expenditure and taxation, and Monetary policy
involves altering the supply of money in the economy or manipulating
the rate of interest. Fiscal policy can reduce aggregate demand by
cutting government expenditure or by raising taxes which results in
reducing customer expenditure. Monetary policy can reduce aggregate
demand by reducing the money supply, thereby making less money
available for spending or by putting up interest rates and thus making
borrowing more expensive.
Supply-side policies aim is to reduce the rate of increase in costs.
This will help reduce leftward shifts in the aggregate supply curve.
This can be done either by restraining monopoly influences on prices
and incomes or by designing policies to increase productivity.
Section 2: International Economics
Should the UK join the single...