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

How can inflation be reduced?

Extracts from this document...

Introduction

How Can Inflation Be Reduced? Inflation is a persistent rise in average price level over a year, it is measured through CPI (Consumer Price Index). CPI takes a basket of goods ,which are weighted due to expenditure in a household budget (so you spend more money on food then shoes therefore food has a higher weight). CPI then looks at how the prices have changed and dictates a rate in accordance to the statistics. Inflation usually carries negative connotations as it usually comes in conjunction with economic instability therefore many different methods have been devised in order to avert the problems of inflation and reduce it. An example of high inflation which was reduced is in Britain. In the 1970's inflation was phenomenal and peaked at over 20%, through successful monetary policy however this was mitigated. By raising interest rates it reduces the growth of aggregate demand it encourages saving (which would stifle consumer spending and investment) as well as reducing disposable income. Monetary policy is a proven technique used to reduce inflation. Favoured by the US and UK it looks at the modification of interest rates in order to control inflation (and reduce) this is know as tightening monetary policy. Monetary policy is the control of money supply by the central bank (so in Britain it is the Bank of England and in the US it's the Federal Reserve). Inflation can be caused because aggregate demand exceeds aggregate supply therefore by reducing consumer spending and investment it can alleviate inflation. To reduce inflation through monetary policy you must increase interest rates. ...read more.

Middle

That is why classical economists argue trade union power should be cut because by doing this you can stimulate supply and help combat inflation. Although the counter argument to this is smaller hours and better pay can actually help production as it creates a happier worker who is less fatigued and happier to work. Also trade unions are a more organised way of voicing concerns, if it were left solely to the worker it could cause chaos. Classical economists also argue that state welfare or unemployment benefits should be reduced. Why would a worker take a low paid job when the government are handing out the same pay in return for doing nothing? The average worker is not going to accept a low paid monotonous job when they could receive the same money for not working. As benefits are too high it means less is being produced as there are less workers (and the labour force makes up a substantial amount of aggregate supply). The classical economists argues that governments should make benefits less appealing by slashing them and give more incentive to have a "low paid" job (I.e. Give more state support to those who maintain a poorly paid job). Another way to stimulate aggregate supply in labour would be to reduce taxes on labour, if corporations did have to spend as much money paying taxes for hiring workers then they would be more inclined to raise employment. Another way to increase aggregate supply (in an attempt to mitigate inflation) is through increasing capital stock. Capital stock is factories, offices and roads basically anything physical that can be controlled through the state. ...read more.

Conclusion

so this could in itself actually cause demand pull inflation. Inflation can be reduced through numerous ways, the most commonly used would be monetary policy, this is because its easy to modify as well as very effective. All the methods however are flawed, personally I would strongly advise not using "price controls", governments do not possess sufficient knowledge on social aspects to dictate prices. Although in extreme situations price controls have to be used (like in a war) other then this they should be avoided as they are too dismissive of social implications. I agree more with the classical ideals as less government intervention does allow more businesses to prosper, it is much wiser to allow competition then to hinder it for inconsequential reasons. Although measures have to be put on businesses these should be a minimal as possible to allow free growth in a free market. A Keynesian would argue that state intervention and state stimulation is paramount to the mitigation of inflation and the growth of the economy. However state intervention has been practised in Britain through the labour government and was embarrassingly flawed. As long as governments protect the consumer while allowing growth of free enterprise inflation can be controlled, its when companies can't compete and consumers halt purchases that an economy have problems. Although monetary is grossly overused it is probably the most effective method of overcoming inflation along with a moderate government who don't adopt too interventionist policies. Although the outstanding panacea for inflationary worries is simply knowing what causing inflation, its no use for governments to adopt monetary policy when fiscal is needed. Transparency of the problem is the real cure for inflation. ?? ?? ?? ?? How Can Inflation Be Reduced? By Thomas Hannah ...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

Here's what a star student thought of this essay

5 star(s)

Response to the question

This essay responds superbly to the task. There is a clear engagement with fiscal and monetary policies being used to reduce inflation, and there is awareness of the limitations of both. There is clear understanding of what inflation is, and ...

Read full review

Response to the question

This essay responds superbly to the task. There is a clear engagement with fiscal and monetary policies being used to reduce inflation, and there is awareness of the limitations of both. There is clear understanding of what inflation is, and how the policies reduce it. However, I would've liked to have seen some diagrammatical analysis to secure this understanding, as this is the easiest way to pick up marks in an exam. The question does not ask for an evaluative response, however there is a clear justified judgement here. This is good, as it shows the ability to look for weaknesses in policies, and discuss the effectiveness. I do think this essay is overly long though, despite the breadth covered.

Level of analysis

The analysis in this essay is great. The definition of inflation is clear and precise, allowing for a focused argument throughout. What I particularly like about this essay is the explanation of the mechanisms. For example, "To reduce inflation through monetary policy you must increase interest rates" is not simply asserted. But, each step from an increase to interest rates, to the eventual decrease in inflation is explained well. This is where a diagram would've simply strengthened the analysis, as shifts in aggregate demand and supply could show the changes in the price level. The awareness of different schools of economic thought shows a very abled economist at A-Level. Examiners love to see that students don't simply accept what the textbook states, and this essay explores how classical and Keynesian views differ. There is some very perceptive and strong analysis here!

Quality of writing

The structure is strong. There is a clear introduction defining the key terms, and a strong conclusion which weaves the argument together whilst posing justified judgements. I would note that putting the first person in a conclusion is unwise. For example saying "I agree more" suggests a personal view, and often these aren't backed up with analysis and strong arguments. By using phrases such as "the analysis clearly shows that" you won't be tempted to make assertions based on personal arguments. Technical terms are used fluently, and economic viewpoints are weaved into the argument well, rather than being forced. This style is sophisticated, and makes for a convincing argument. Spelling, punctuation and grammar are flawless.


Did you find this review helpful? Join our team of reviewers and help other students learn

Reviewed by groat 01/04/2012

Read less
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 ...

    The Bank of England normally operates the scheme. All persons wanting foreign exchange make an application to the bank. The Bank of England then grants or refuses their request. In refusing requests for foreign currency they are effectively reducing the money supply of the pound on to the market, therefore raising the price of the pound or economy.

  2. The Consumer price index

    The rise in the price of goods and services could therefore be due to a better quality product. Electrical items have become hard to compare lately because of the advances in technology. When items have become more expensive because of an improvement in the quality of the goods the CPI calculated may be over-inflated.

  1. Macroeconomic Impact on Business Operations

    "Because monetary policy works more subtly, it is more politically palatable (McConnell, 2005, pg 305). Monetary policy has two advantages over fiscal policy: 1) speed and flexibility and 2) isolation from political pressure. Monetary policy changes can be quickly enacted by the Federal Reserve System on a daily basis and

  2. Free trade and protectionism

    In this graph, the price and quantity equilibrium which is at the intersection of the demand and supply curves can only be gained in a closed economy without trade. When we incorporate free trade into the model, the price of the good in the world market is Pworld.

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

    Supply shocks include...sustained productivity improvements and technological innovation that lowers prices of inputs and outputs...Demand shocks can arise for several reasons: a collapse in the stock market or property prices, a sustained strengthening of the exchange rate, wars...that undermined business confidence.'

  2. ECONOMICS PAST PAPER QUESTIONS WITH ANSWERS - price elasticity and inflation.

    Thirdly, the price system enables the economic problem to be solved in a way which combines efficiency. Efficiency, because the profit motive promotes enterprise; because movements in the relative prices of the factors of production stimulate entrepreneurs to economize in the use of scare factors.

  1. Unemployment, inflation, economic growth and balance of payments have close relationships with aggregate demand

    Exchange rate fall is another problem because it pushes up the price of import and may fuel inflation. To achieve the goals of avoiding balance of payments and exchange rate problems in short-run, governments might try to increase the interest rate by decrease aggregate demand or carry out fiscal deflation.

  2. Price mechanism allocates a country's resources efficiently. Do you agree?

    The price mechanism works through the interaction of prices, that is, the prices of goods and services, the prices of factors of production and through the profit motives of producers. The price that goods and services can command and the cost of production determine the allocation of resources for their production.

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