Control Of Inflation Essay, Research Paper
The governments of most
developed economies now appear to be primarily concerned with inflation and how
to keep it down as opposed to maintaining full employment or restricting the
money supply. However, unlike in other areas of the economy, the actions the
government can take to control inflation are quite limited. This is because
people and firms behave according to their expectations not only of inflation
but also of what they consider the government will do. As a result of these
implications, governmental actions to control inflation may not have the
desired results. If the actions of the government are consistent, though, it
will be possible for people?s expectations to be built around what they believe
the government will do.
To illustrate an example of this, consider the
following model. The short-run Phillips curve is believed to show the trade-off
between jobs and inflation, although since the early 1960s the relationship is
not as clear as it once was. Monetarists like Friedman, though, believed that
in the long-run the natural rate of unemployment is static: shifts in inflation
and employment will always return to this level. In other words, it is the
equilibrium that will be returned to when the level of inflation is correctly
anticipated. The long run Phillips curve (LRPC) is drawn in figure one with a
number of short-run curves crossing it (each labelled SRPCx), which
represent short-term fluctuations causing trade-offs between levels of
inflation and levels of unemployment[1].
Suppose the government in the long run wishes to keep inflation at 0%, which is
at point A, giving a level of unemployment at U*, which is the natural rate.
The government is able to set this target because in the long-run there can be
no trade-off (the UK currently has an inflation target of 2.5%: recognising the
practical difficulties in holding prices completely stable as this model is
supposing). At point C, the government could try to reduce inflation, which
will temporarily increase unemployment as inflation moves along SRPC2 ,
but eventually the shifts in aggregate supply and demand will cause
unemployment to return to U* . Given that the government has a declared policy
of keeping inflation at 0%, firms and presuming it to have been successful,
trade unions will set prices and wage claims appropriately, to account for
this, and SRPC0 will be the short-run curve that is used. Now, suppose that the
government, fearing electoral defeat, wants to increase unemployment above the
natural rate for short-term gain. By following an expansionary fiscal policy,
it would be possible to move up SRPC0?
and reach point E, which offers far lower unemployment than point
U*, but at a higher level of inflation.?
However, if this is done, the government will lose its credibility,
because wage claims? and price levels
will have been settled expecting inflation at 0%. Once it is seen that the
policy has been abandoned, firms and trade unions will have to settle wage
claims and price levels to account of the new, increased, inflation rate. It is
likely that this will cause the economy to shift upwards to SRPC1,
which puts long-run equilibrium at point B, offering inflation at y% for the
natural rate of unemployment. At point B, there is less chance of the
government trying to temporarily increase the level of employment for short
term gain, as shifting along this short-run curve will cause inflation to be even
higher. The -government is expected to renege on its promises, so its attempts
to control inflation will therefore depend on whether or not it is believed. A government may desire
to have a good reputation for keeping its promises, and therefore it may
deliberately constrain itself into a policy to enable it to try to resist the
temptation to renege on them for short-term gain. By giving the power to set
interest rates to the Monetary Policy Committee of the Bank of England and
giving them a level of inflation to try and reach, the Labour Government is not
only less able to manipulate the economy for political advantage, but also able
to send a signal out to the country that they mean what they say. Likewise,
joining the Exchange Rate Mechanism was an earlier attempt to commit the
country to a certain inflation policy. The latter, though, had to be abandoned
due to the inability of the economy to hold itself at the entry rate without
having levels of unemployment that would have been political suicidal. However,
when the UK was pulled out after Black Wednesday in 1992, the credibility of
that government was lost, and thus the private sector lost faith in the
government?s policies. In this way, control of inflation can be said to depend
on what action the government actually takes as opposed to what people believe
they will do, as when changing policies for short-term gains destroys their
credibility. The government may
attempt to control inflation through pursuing controls on prices and incomes.
Income controls usually tend to relate to wages, as opposed to dividends and
other forms of income, as it is easiest to implement. However, to be effective
they need the support of both employers (represented in the CBI) and the
workers (in the TUC). These bodies, though, only have limited control over
their members and so it may be hard to enforce. Even in the public sector,
where the government is able to intervene directly, there will have to be a
large degree of acceptance, otherwise opposition (and even strikes) will be
faced. Evasion of wage controls, either through recognised exemptions which may
be too broadly or vaguely defined, or negotiated secretly at the local level,
is also a problem. Moreover, if a maximum level is set, all workers may
consider themselves entitled to receive it. Such controls were tried in the
1970s but were not very successful. The Thatcher government in the early 1980s
managed to reduce inflation at the expense of rapidly rising unemployment
through refusing to give in to wage demands and increases in the manner which
governments of both colours had done in the past. [1] These curves have been drawn
as straight lines in order to make the diagram clearer. Phillips curves are
usually considered to be curved (hence the name).
Другие работы по теме:
Letter Essay Research Paper When examining an
Letter Essay, Research Paper When examining an issue it is essential that you look only at the facts and not let your opinion get in the way of what is known to be truth. Such is the case in the
Cinderella Essay Research Paper Cinderella The stepsistersOne
Cinderella Essay, Research Paper Cinderella (The stepsisters) One day this girl decides to waltz into our home and tries to be ?Miss Everything?, but to us, she?s nothing. It?s as if she?s trying to steal all the good things we have, but thank G-d we have the control over her. We are allowed to say, ?Cinderella, do this!? and, ?Cinderella, do that!?, but we can?t take complete advantage of her (unfortunately).
Gun UnControl Essay Research Paper Gun Control
Gun Un-Control Essay, Research Paper Gun Control 1st affirmative speech Anyone who thinks that we have enough gun control laws is either NRA, or severly mistguided. And since I’m probably going to end up getting brushed off in the long run anyway, I’ll get my teams two cents in. There is really no place to begin, so I’ll dive on in head first.
Revolutionary War 2 Essay Research Paper The
Revolutionary War 2 Essay, Research Paper The British lost and the Americans won the Revolutionary war. Though this is true there are arguments that the British lost the war more than the Americans won it. The Americans were under the control of the British and the Americans at first did not even have the intention of independence.
Dollarization Essay Research Paper Richard W Stevenson
Dollarization Essay, Research Paper Richard W. Stevenson s article Greenspan View on Wider Use of Dollar discusses a process he refers to as dollarization. According to Mr. Stevenson, A number of countries have been considering abandoning their national currencies and adopting the American dollar the accepted international benchmark of stability as a way of reducing interest rates, inflation, and exchange rate volatility.
Thomas More Essay Research Paper More
Thomas More Essay, Research Paper More’s purpose in writing utopia was quite clearly to open people’s eyes to the social and political evils of the world around them, e.g. inflation, corruption, maltreatment of the poor, wars for little or no purpose, courtly ostentation, the misuse of power by absolute monarchs, etc.
Stealing Our Rights Essay Research Paper Stealing
Stealing Our Rights Essay, Research Paper Stealing Our Rights From the dawn of the first organized communities, to the powerful United States of America today, there have always been power hungry people who
Gun Control Essay Research Paper Are you
Gun Control Essay, Research Paper Are you ready to die? What?s more, are you ready to kill? When you hold a gun anywhere but the firing range you?d better be ready and able to use it or die. Don?t get me wrong; just because you carry a gun doesn?t mean people automatically start being violent towards you but if you get in a fight and someone realizes you have a gun it?s more than likely that they will pull one and shoot you if they have it.
Canadian GDP Essay Research Paper The output
Canadian GDP Essay, Research Paper The output or GDP of Canada has increased from 1995 to 1999. This means that more people became employed or productivity has risen. With the GDP on the rise, Canada is able
Inflation Essay Research Paper InflationInflation is defined
Inflation Essay, Research Paper Inflation Inflation is defined as ?a period of rising prices when the purchasing power of the dollar is falling.? What this boils down to is that as time goes by the dollar bills worth decreases while at the same time prices rise. Now when I say the dollar bill?s value decreases I don?t mean a dollar reduces to ninety cents.
Benificial Insects Essay Research Paper Beneficial Insects
Benificial Insects Essay, Research Paper Beneficial Insects Insects have been roaming the earth for millions of years. They have adapted to every climate and terrain on earth. No matter what we do they will always be amongst us. This is not necessarily a bad thing; insects are actually beneficial to us. Insects help pollinate our crops each year.
Pesticides Essay Research Paper Give an account
Pesticides Essay, Research Paper Give an account of the ways in which biological control can be used to control pest numbers. The effect of predator-prey relationship in regulating populations has been exploited by humans as a method of controlling various pests. Biological pest control is where the natural predators (agent) of the pest ((target) are used to reduce its population to a tolerable level.
Greenspan Essay Research Paper Since Alan Greenspan
Greenspan Essay, Research Paper Since Alan Greenspan became chairman of the FED, the country’s economy has reflected many positive results. He has done a terrific job. Allan is a very bright man who is always thinking of ways to prevent problems before they happen in the economic sector of the nation. All economists have been very content with his job just until now.
Greenspan Essay Research Paper Federal Reserve Board
Greenspan Essay, Research Paper Federal Reserve Board Chairman Alan Greenspan vows to promote ?low and stable inflation.? The main goal of the U.S. economy is to maintain price stability. This reduces the likelihood that imbalances could develop that would ultimately undermine the record economic expansion that the U.S. is currently having.
Gun Control Essay Research Paper Topic
Gun Control Essay, Research Paper Topic: Gun regulation 1. Do you believe firearms should be banned all together including police and military? 2. Do you believe firearms should be banned from civilians only?
Gun Control 2 Essay Research Paper We
Gun Control 2 Essay, Research Paper We the students of class 7-508 do not agree with the statement that people should carry weapons. We do not agree with this statement
Inflation Has Been More Subdued Than In
The 1970S What Are The Reasons For This And Will They Endure Essay, Research Paper Inflation has been more subdued than in the 1970s. What factors explain this and are they likely to endure?
The Economy Brazil Pushes Markets To The
Edge Essay, Research Paper It may appear strange that the problems facing the Brazilian economy effects the U.S. as well. The financial depressions of Brazil bring the wealth of the nation down in turn. Brazil is the largest economy in Latin America, accounting for almost half of the continent’s total output, and it is the eighth largest economy in the world.
Inflation Essay Research Paper Inflation a rise
Inflation Essay, Research Paper Inflation, a rise in the average level of all prices, is a problem that can affect both developed and undeveloped countries. It occurs when the economy is producing at or near full capacity. As inflation increases, the purchasing power of the dollar decreases. As prices rise, wages and salaries also have a tendency to rise.
Progressive Taxation Essay Research Paper A Discussion
Progressive Taxation Essay, Research Paper A Discussion on Progressive Taxation The United States government taxation system is based off the fundamental progressive taxation theory. Most people don t fully understand the taxation system and question the validity of the system the United States currently has.
Grade Inflation Essay Research Paper What is
Grade Inflation Essay, Research Paper What is the definition of grade inflation? The most obvious definition is that grade patterns change so that the overwhelming majority of students in a class, college, or university receive higher grades for the same quantity and quality of work done by students in the past.
How Are Automatic Stabilizers Used To Combat
Inflation Essay, Research Paper How are Automatic Stabilizers Used to Combat Inflation? In today?s economy, there are devices present called automatic stabilizers. Automatic stabilizers, are mechanisms which aid in the correction of an economic problem without the interference of anyone or anything.
Aboriginal People Essay Research Paper Many of
Aboriginal People Essay, Research Paper Many of the Aboriginals have developed a way of life that they are satisfied with, but by these big organizations taking control over their communities they have no way of stopping them, without the support of other people in the community. Many aboriginals have lived on these reservations most of their lives, so much of their history has been from living there.
Cheap Decorating Essay Research Paper With today
Cheap Decorating Essay, Research Paper With today’s inflation how can anybody find the money to decorated their ugly boring living room? Well, I have the solution for you, decorate with little money. Just follow these three easy steps and you’ll be on your way to a beautiful room.
Economics Essay Research Paper
Explain why the problem or topic written about in the article is important in the study of economics. This article is important to the study of economics because economics deals with the management of the income, supplies, and expenses of a household, community, government, or other group or organizations.
Big Bang Essay Research Paper Before The
Big Bang Essay, Research Paper Before The Big Bang Every since scientists came up with an idea of how the universe started and was created, through the Big Bang, there has always been discussion and questioning on what the universe was, before it was created. Was there nothing because there was no time and no God, or was there something we haven t discovered yet.
Death On Demand Reaction Paper Essay Research
Paper Death on Demand Reaction Paper Death on Demand was quit interesting. Throughout the novel several economic concepts were cleared up therefore, helping me to better understand them. But also, at the same time I was further confused about several others. I was especially intrigued by the following four concepts, and the characters in the novel helped my understanding of them grow.
Do Higher Wages Cause Higher Prices Or
Do Price Rises Cause Wage Rises? Essay, Research Paper Do higher wages cause higher prices, or do price rises cause wage rises?? What are the policy implications in either case?Inflation involves
Federal Monetary And Fiscal Policy Essay Research
Paper The management of the money supply and interest rates is what is known as monetary policy, The Federal Reserve System (the Fed) was established by an Act of Congress in 1913 and consists of the seven members of the Board of Governors in Washington, D.C., and twelve Federal Reserve District Banks.
Gun Control Essay Research Paper Gun EssayShould
Gun Control Essay, Research Paper Gun Essay Should we really just keep adding gun control laws? Well, I don’t think so. I think that Senator Larry E. Craig said it best “the criminal that wasn’t stopped by 20,000 laws won’t stop at 20,001.“ My viewpoint is that we should have better law enforcemnt.
Minimum Wage Regression Essay Research Paper Jadro
Minimum Wage Regression Essay, Research Paper Jadro 1 John Jadro Webonomics Mr. Haessler 17 February 2000 Minimum Wage Regression The proposed increase in minimum wage will do a number of things to the economy. The greatest effect it has will be on inflation. There is a strong correlation between raises in the minimum wage, and raises in inflation.