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

Explain why the control of inflation is an important objective of government economic policy.

Extracts from this document...

Introduction

Explain why the control of inflation is an important objective of government economic policy Inflation is defined as a persistent rise in the general or average price level and is usually given as the percentage change on the previous year. Governments will often have very set aims with what it wishes to happen to the rate of inflation. This is because changes in the inflation rate can have vast repercussions in many aspects of the economic environment. There are two different causes of inflation. It can be caused by excess demand in the economy. If this occurs it means that the amount of people who want a product exceeds the amount being produced. ...read more.

Middle

This type of inflation can have massive effects in a variety of different industries, i.e. when a raw material that is universally used is increased in price. An example of this is oil as it is used in a wide range of industries. One effect of inflation and a reason for its concern is that income will be likely to be redistributed between the economic agents in an economy. This could be between 'savers' and 'borrowers' or even between households and the government. It can mean the real value of peoples savings falls, as the money will be able to buy less goods and services than before. People who have borrowed money before the rise in prices will benefit as the amount they have agreed to repay will represent less in real terms. ...read more.

Conclusion

Unemployment can also occur as a result of a worsening in the balance of payments deficit. If British goods become more expensive then fewer people abroad would purchase them. The other side of this is that British people would also purchase more foreign-made goods. This would cause unemployment to increase and the Balance of payments to worsen. It is of great importance to the government to control inflation, as the effects of large rises in the price level can be very damaging to both the economy and the people within it. The government will still want some degree of inflation as the people who usually gain from it 'borrowers', people with mortgages and indeed the Government. The main people who suffer most due to inflation are lenders, people on fixed incomes and exporting firms and industries. ...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 ...

    Expansionary policies may be used by governments, which wish to reduce unemployment and achieve a higher rate of economic growth. For example, Fiscal policies, e.g. tax cuts and increases in expenditure, and a Monetary policy of reduced interest rates will all tend to increase aggregate demand.

  2. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    An increase in the price level of finished manufactured imports [e.g. cars, televisions] will lead directly to an increase in the price level. An increase in the price of semi-manufactured goods and raw materials used as component parts of domestically produced goods will feed through indirectly to the price of domestically produced goods.

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

    The decision taken while Lamont was Chancellor to keep a balanced budget at all costs was very important and so was Ken Clarke's decision to publish the minutes of his meeting with the Bank of England when they had their monthly meetings to discuss what should happen to interest rates that month.

  2. With the aid of diagrams, illustrate the causes if inflation and deflation, and by ...

    shifts in the AS curve. If the firm face a rise in cost, they will respond partly in raising prices and passing the costs onto the consumer and partly by cutting back on production (there is a movement along the AD curve)' Monetarists believe that inflation is caused solely by the supply of money in circulation.

  1. Fiscal policy is a macroeconomic policy.

    by increasing aggregate demand, and a contractionary stance leading to smaller deficit or larger surplus will reduce economic activity. (also see pg 2 budget outcome) Impact on savings and CAD A relationship exists between the size of the Budget and the size of the CAD and foreign debt.

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

    I shall compare what was spent on those sectors in the year 2006 and compare that with the budget released in 2007. Taking into account inflation, which from 2006 to 2007 was 3% I can work out whether spending, has increased by a lot, remained the same or dropped.

  1. Budget 2004-05 and Economic Analysis of Pakistan

    and 2004-2005 (budget) is given in Table below: (Rs. in Million) 2003-2004 2004-2005 Classification Budget Revised Budget * RESOURCES (a + b) 767298 783356 842620 * Internal Resources 608169 638536 686265 Revenue Receipts(Net) 513536 549572 557165 Capital Receipts(Net) 36677 39789 64439 Financing by Provinces for PSDP 29990 34845 33110 Change in Provincial Cash Balance 27967 14331 31551 * External

  2. Discuss the idea that if the economyis to prosper in the long run, the ...

    Economising on cash balances requires time and effort. For example, individuals have to make more visits to the bank and other financial institutions to withdraw money. This has been termed the 'shoe leather' effect of inflation. In general, there is also a loss of convenience associated with the holding of a liquid asset.

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