• 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. Budget 2004-05 and Economic Analysis of Pakistan

    An amount of Rs 349516 million will be consumed by Executive and Legislatives Organs or 50% of the Current Expenditure. While 27.67% for Defence, 7% for Economic Service and 1.74% for Education have been allocated in the budget estimates 2004-05.

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

    Shoe-leather costs are one of the costs inflation can bring. At times of rising prices, consumers and firms will be less clear about what is a reasonable price - this leads to 'shopping around' which is a cost [mainly time - the time could have been spent working, therefore possible wages].

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

    from the valleys, as it was the nearest, and coal is so difficult to transport. Now they use coal imported from Australia as it far cheaper, it is now cheaper to bring raw materials all the way around the world than use the ones closest to you.

  1. 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.

  2. Comparing the effects of immigration on GDP in Malaysia, Japan and South Africa.

    One of the examples of stricter punishment is to impose mandatory whipping of more strokes of cane. Besides, immigrants can also be fined once they were found to sneak into Malaysia. 9.2 Detailed Health Check on Immigrants Before Coming In.

  1. Fiscal policy is a macroeconomic policy.

    sector and the private sector, it is the private sector that misses out. They are "crowed out" of the pool by the public sector, alternatively the inflow of fund must come from overseas which lead to increases in the size of for foreign debt.

  2. This report will highlight how Government policy could change to try to: Increase economic ...

    This can be undertaken in several ways: 1. Monetary policy can control the growth of demand through an increase in interest rates and a contraction in the real money supply. Higher interest rates reduce aggregate demand in five main ways: * Discouraging borrowing by both households and companies.

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