• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Discuss the idea that if the economyis to prosper in the long run, the control of inflation should be the mainobjective of Government

Extracts from this document...

Introduction

Discuss the idea that if the economy is to prosper in the long run, the control of inflation should be the main objective of Government. Since Edward Heath spoke about inflation in 1973 it has been a generally held view that the conquest of inflation is the most important task for government economic policy. Whilst this view is beginning to be challenged in all political parties, the public universally regard inflation as having a detrimental affect on the economy. The problems caused by inflation can depend on whether the inflation is anticipated or not. If everybody knows that inflation is going to be 10% this year, and it is, then firms and consumers can plan for this. Although such planning does not eliminate the costs of inflation completely, it does mean that the rates may be more moderate. The result of a higher rate if inflation, which is fully anticipated, is to raise the nominal (or market) rate of interest by the increase in the rate of inflation. In the long run this implies that the nominal rate of interest will be equal to the real rate of interest plus the rate of inflation. Thus, if inflation is higher in the UK than it is abroad, the nominal rate of interest will be higher in the UK. This is likely to attract mobile capital funds into the UK. With a floating exchange rate, the inflow of funds will lead to an appreciation of the sterling exchange rate, which may have adverse consequences for the balance of payments. ...read more.

Middle

Typically, the amount of income tax we pay depends on our nominal (money) incomes, and the amount of capital gains depends on the increase in the nominal value of our assets. As a result of this type of tax system the tax to pay increases simply as a result of inflation, with no change in the structure of neither tax rates nor our real pre-tax income. The effect of this is most significant on the lower income groups. If we consider the effect of inflation halving the value of money, and so what previously could have been bought with �4000 pounds now needs �8000 pounds, then it is clear that someone earning �4000 a year before inflation will have no tax, however after inflation they earn �8000, but the purchasing power of their income has remained unchanged, meaning that they are now taxed �1000, 25% of their income without earning anymore or the tax structure changing. Probably the most common danger associated with rising inflation is that it turns into hyperinflation. During times of hyperinflation money loses its value so quickly that no one wishes to keep it for a moment longer than necessary and there may be such a flight from money that the velocity of circulation approaches infinity. If this occurs, exchange of goods will no longer be carried on with money but will be made on a purely barter basis. The economy would thus lose the advantages of monetary exchange and therefore operate less efficiently. It is possible to identify a number of costs that might be incurred by society as a result of the inflationary process. ...read more.

Conclusion

What is more, the exploitation of complementarities would address the apparent trade-off between unemployment and inequality by giving the unemployed greater incentives to work. Unemployment policies are also characterized by political complementarities, when the ability to gain political consent for one policy depends on the implementation of other policies. For example, the political feasibility of unemployment benefit reform - such as reducing the magnitude and duration of benefits - depends on tax reform - such as reducing payroll and income taxes - and employment promotion policies - such as hiring subsidies. The reason is that 'single-handed reforms' - such as reducing unemployment benefits without changing any other policy instrument - may improve economic efficiency, but they often pit the interests of the employed against those of the unemployed, creating political deadlock. In contrast, 'broad (many-handed) reforms' enable the government to use the efficiency gains from one reform to compensate the losers from another reform - and vice versa - thereby breaking the political deadlock. Complementary policies call for a distinctive approach to policy-making. When only a small number of unemployment policies are under consideration, it may be politically impossible to implement them and their impact on unemployment would be small. It is only when a broader range of policies are implemented simultaneously that they become politically feasible and economically effective. In conclusion, there are long-term policies, which the government tends to favour, to increase the productive potential of our economy and attempt to reach that potential, however, due to the many inconveniences and obstacles to the effective implementation of these policies, they rarely are as successful as they hope to be. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. What are the government objectives? Explain why each is important and how the government ...

    On the contrary, deflationary measures should help reduce inflation because governments are less likely to print money to pay for large budget deficits. Deflation is the commonest method used by governments to reverse a current account deficit. Changing of domestic interest rates also has an effect on both the current and capital accounts.

  2. Whether an increase in the rate of inflation in the UK always and solely ...

    Within the next graph, one may assume that the central bank increases money supply, as result, there would be a fall in the rate of interest from R1 to R2. According to the loadable fund theory, if it's assumed that only demand for borrowed fund comes from firms or government

  1. Budget 2004-05 and Economic Analysis of Pakistan

    Electricity, gas, water supply and construction have registered growth above the target rate. Most notable performance has been witnessed in construction and gas and electricity sub-sectors. Against a decline of 2.5% last year, a phenomenal growth of 23% was recorded in the case of gas and electricity sub-sector.

  2. What are the characteristics of a good tax system? Discuss the advantages and disadvantages ...

    There is much concern on equity in the tax system. A tax system, basically, is a major means of effecting redistribution. This occurs first by ensuring that taxes are raised in an equitable manner, and second by using the tax revenues on the expenditure side of the government budget to provide cash payments and goods to low income people.

  1. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    This means that a drop in interest rates will mean that a large number of people will be able to spend a lot more money per month on other forms of expenditure. This shows how an increase in consumption will shift aggregate demand to the right and thus prices will increase from P1 to P2.

  2. Inflation vs. Unemployment - In what way might there be a trade off ...

    There are different types of unemployment. Such as frictional unemployment, which is workers that are temporarily between jobs, to voluntary unemployed, who are workers choosing to remain unemployed. The table below illustrates the different types of unemployment.1 Type Description Cause Remedy Frictional Workers temporarily between jobs Delays in applying interviewing and accepting jobs Improve job information, e.g.

  1. What Are The Causes Of Inflation? Can Government Control It? Discuss Which Economic Policies ...

    the cost of their factors of production this will then force them to raise their prices for them to remain in business. These rising cost could be attributed to rises in the workers salaries, workers and unions push for and receive an increase in their wages.

  2. To what extent does the government budget/statement reflect current government priorities?

    looking at the government's main aims and objectives and comparing whether the money they are spending on each one is reflecting that; for example if in public order and safety the government wanted to initiate huge crackdown on underage drinkers and vandalism then surely the money spent in that area would be increased dramatically.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work