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Summary of Article one. “Back to Basics Inflation”

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Introduction

Summary of Article one. "Back to Basics Inflation" This article on inflation describes the effect of inflation on the economy as a whole and on the effects on Money. The article gives a definition of inflation as the persistent rise in the general level of prices. The first point explained is about the inflation rate in 1970, which showed prices had risen to 26.9%. This would prove a great problem to the public if there were not a raise in real income as most necessities would not be affordable. Also due to this rise in prices Savers suffered due to low interest rates and those who borrowed money had to pay less for their debts. The article then talks about the effects of inflation on the functions of money; it explains that the function of money was to replace the barter system where commodities were exchanged in terms of another product or service. ...read more.

Middle

Then powerful trade unions win large wage rises and it goes on. Other consequences of high inflation are that the Exchange rate for the sterling pound will depreciate. This would lead to imports becoming expensive then Exports. The article then explains that the governments counter inflationary policy was to keep the a high exchange rate this way imports become cheaper and the British Producers can be "pressured" into keeping their prices down. Finally the article argues why it took so long for the government to reduce the rate of inflation. If inflation was too low then there were worries of high unemployment as low prices meant low sales revenue thus Labour force could not be extended. And if The Government calculated that there was a deficit of too much spending over tax revenue then it would mean higher taxes which intern would rate aggregate demand thus rising inflation. ...read more.

Conclusion

Due to the September 11th attacks, the article then questions consumer confidence whether it is high or not. It argues that some consumers may be scared to go on holiday or reduced the amount spent or on the other hand to cheer themselves up go on spending sprees. It seem that the MPC has to decide whether to reduce interest rates or to increase fiscal activity. To conclude the article talks about growth saying that the EU and the US are likely to grow by 1% and if the US do not and stay in recession throughout 2002 there would be negative implications for the exchange rate for the dollar. It would seem that dollar would depreciate in value and the euro would gain in value. For the sterling it would mean downwards pressure if the euro referendum "fever" becomes intense. This would also aid persuasion for Great Britain to enter the euro. ...read more.

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