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

To what extent is inflation a serious economic problem.

Extracts from this document...

Introduction

To what extent is inflation a serious economic problem Inflation is defined as the general and sustained increase in prices of goods and services. It is caused by many factors, but in particular three factors have a major effect on the value of inflation. The first cause is too much demand within the economy. This occurs when an increase in demand cannot be countered by an increase in production in the short term due to fixed factors (e.g. land) and so producers will increase the prices to decrease demand for their products. Aggregate demand, the demand within the whole economy, suddenly rises for a product for two reasons in particular. The first is that inflation has been so low in the economy that tax revenue, for example has been falling, due to less spending and increased saving, so in order to 're-flate' prices. They provide subsidies and ask for a lowering of interest rate to boost spending and 're-flate' the economy. The second reason maybe that greater consumer confidence within the economy has lead to increased spending and thus Aggregate demand increasing. This will mean that prices for consumers have risen, due to producers 'pulling' up their prices. There could be a disadvantage to pulling the prices up. ...read more.

Middle

Due to the sheer volatility of inflation rates investment can be hard to plan. This may lead to the value of their inputs being higher than the value of the output, and so losses may occur. This can be seen as a serious problem as investment will fall for a product, thus leading to a fall in productivity and thus redundancies have to be made to make up for financial loss. With inflation people will have to search for goods that will give them good returns for their savings to help protect their real earnings. The cost of doing this is known as the Shoe Leather Cost. This maybe good for the consumer as it encourages more firms to be price competitive, also showing which suppliers are adjusting their prices for inflation, but could be seen as a problem because consumers may have to travel far to get the best returns. Menu Costs are also included in assessing problems with inflation. Menu Costs are the costs of changing the labelled prices of goods according to inflation so they are affordable. This maybe a problem for suppliers as inflation rates are sometimes very volatile especially in periods of high spending and low interest rates. ...read more.

Conclusion

The problem that is always on the government's mind is whether this inflation will affect the way the country is run. For example if the inflation leads to mass unemployment, will they lose votes. Demand Side Policies: help the government reduce aggregate demand, demand pull inflation, by imposing higher taxes on spending and increasing interest rates, discouraging borrowing and encouraging saving. Supply Side policies are used to make the labour market more competitive, in effect reducing the costs from businesses which could give rise to cost push inflation. So using these policies they reduce the power that trade unions have. For example so they cannot campaign for certain things that can cost the firms that their clients work for a lot of money. The severity of the problem of inflation is shown by the fact that even the government see it as a major problem, they even go to the extent of making policies to stop inflation increasing. However the extent to which the problem is regarded serious is debateable. Prioritising it, in the government's eyes it is at the top, in businesses eyes it may not be a major key in their production process. Inflation can be regarded as a major economic problem when looking at the status of the national economy; it has many costs and hardly any direct benefits. ...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 engages superbly with the question. There is a clear progression from knowledge of what inflation is, how it affects the economy, and then a discussion of the extent to which it is serious. The key part that this ...

Read full review

Response to the question

This essay engages superbly with the question. There is a clear progression from knowledge of what inflation is, how it affects the economy, and then a discussion of the extent to which it is serious. The key part that this essay addresses, that most others don't, is the extent. By doing this, this essay is able to access all the levels and will gain the top marks due to the perceptive analysis and evaluation throughout. I liked how they used phrases such as "it depends upon" as this shows a strong awareness that economics isn't clear cut, and it varies with each situation.

Level of analysis

The analysis here is superb. The definition of inflation is clear, and the causes of inflation are outlined well. I particularly liked the use of diagrams to show the effects of inflation, as that's what this question is implicitly wanting. There needs to be a discussion of the effect on real GDP and the price level, and this essay manages this with diagrams. A suggestion with diagrams would be to have a sentence such as "An increase in aggregate demand causes a shift from AD to AD1, which causes macroeconomic equilibrium to change, with P moving to P1 and Q increasing to Q1". A sentence such as this is an easy way to secure analysis marks. The main costs and consequences of inflation are explained well. The mechanisms are explained step by step, showing how an increase in inflation will affect businessmen, etc. Such technique shows strong understanding of the technical concepts. What was very strong in this essay was the consideration of viewpoints. They are right to question whether each party will see inflation as a serious problem, and goes onto discuss whether inflation is seen differently. Perceptive evaluation is what they are looking for when awarding the top marks.

Quality of writing

The structure here is strong, as it has a clear introduction and progresses through knowledge and analysis, giving the foundations for the later evaluation. By doing this, it makes it easier for examiners to allocate marks. Technical terms are used fluently, and the style is strong which makes for a convincing argument. Spelling, punctuation and grammar are strong. An essay to be admired!


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

Reviewed by groat 20/03/2012

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. Marked by a teacher

    To what extent is economic growth desirable

    4 star(s)

    So the many environmental externalities of economic growth will accumulate more problems in the future which the world cannot cope or deal with. Another reason why economic growth is not desirable is the potential for inflation to spur out of control.

  2. Peer reviewed

    GDP, or Gross Domestic Product.

    5 star(s)

    be worth $104, and country B's goods will be worth $110, other things remaining equal.

  1. Peer reviewed

    How can inflation be reduced?

    5 star(s)

    Fiscal policy is government manipulation of the economy through spending policy, taxes and borrowing. Governments can choose whether or not to borrow money or increase/decrease taxes, this is done in March (in Britain) by the Chancellor he/she expresses how his party will be using their money (usually on Health, Roads, Defence etc).

  2. Peer reviewed

    Discuss whether deflation or inflation is a more serious problem for the economy

    3 star(s)

    Deflation will cause problems for those who have debt as they will see the real value of their debt increase. This will lead to lower consumer confidence and activity resulting in lower economic growth. If the real values of debts are high; people will feel the need to wait for

  1. What are the economic effects of inflation?

    This is because people believe that they can benefit from inflation by investing to profit from and paying back less money in real terms rather than investing productively and benefiting the economy as a whole.

  2. Examine possible factors which might have led to changes in the value of the ...

    Nevertheless, the improvement in the balance of payments may not necessarily occur in the long run due to the Marshall Lerner condition which states that a significant devaluation will only improve the balance of payments if the sum of the price elasticity of demand of exports and imports was greater than one - i.e.

  1. What are the Government's main economic objectives?

    time which may be reinvested in many areas of business hopefully improving productivity. The extent of the effect this may have on the growth the economy, which is likely to slight at best, will depend on the attitudes of the businesses who benefit and whether they reinvest efficiently.

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

    Explain what influences the price elasticity of supply of a product. (8) Ans 3:- Price elasticity of supply measures the degree of responsiveness of quantity supplied to a change in the price of the commodity. Formula of Price elasticity of supply = percentage change in quantity supplied ______________________________ Percentage change in price.

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