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

What Are The Causes Of Inflation? Can Government Control It? Discuss Which Economic Policies Are Appropriate For The Control Of Inflation.

Extracts from this document...

Introduction

What Are The Causes Of Inflation? Can Government Control It? Discuss Which Economic Policies Are Appropriate For The Control Of Inflation. Inflation is a sustained rise in the average prices of goods within an economy, it can also be seen as a change in the purchasing power of money. Inflation can normally be divided into two types cost-push and demand-pull. Cost-push happens when prices are pulled up by rising costs, demand-pull happens when demand outstrips supply and prices will therefore have to rise to accommodate this. Monetarists argue that inflation is caused increases in the money supply, the total amount of money circulating in the economy at one time. This is as the believe that any increase in the money supply which is not in line with the growth in output of the economy will lead to inflation. If the money supply was increased in the short-run then consumer spending would increase but the output of the producers would not be able to expand, as quickly, so there would be an increase in price to curb this demand. ...read more.

Middle

Another lees common cause is if the natural resources from shareholders can increase production costs if monopoly power is used. The price of imported goods can lead directly to inflation if these rise and it will be more direct if it is imported finished goods as it will add to the general level of prices. Another less common cause is if the major natural resources of a country are running down (i.e. north sea oil, decline is fishing stocks.) Perhaps another cause of inflation could be uncertainty and lack of investment. Inflation causes uncertainty amongst the business community, especially when it is fluctuating. If it's difficult for a firm to predict their costs and revenues they may decide not to invest, therefore this will reduce the rate of economic growth. The policies, which are designed to reduce inflation, may actually reduce economic growth, especially in the short-run. On of the most important tasks of any government are to control inflation, this could be done in a variety of ways. ...read more.

Conclusion

Supply side policies, these are policies, which enable the producers to operate effectively. Increase in competition and reward for hard work and innovation Reducing income or corporation tax to encourage entrepreurs and employees to be more efficient by allowing them to keep more of their income or company profit. Cutting state benefit in order to encourage the unemployed o return to work. Privatising nationalised industries to open them up to competition from other businesses. Supporting firms that provide training to create a more efficient workforce Control of trade unions as they may prevent wages from being flexible Removal of restrictions to employment such as maximum number of working hours per week Reducing the national insurance contributions of employers in order to reduce the cost of taking on new employees Exchange rate policy, this policy will affect the costs of imports and exports so therefore will have a knock on effect on inflation. Income policy is the process of imposing limits on pay and price increases maybe a pay freeze on public sector workers pay. ?? ?? ?? ?? Michael Boyce 2128909 ...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. Peer reviewed

    How can inflation be reduced?

    5 star(s)

    and also means less people are employed (more unemployment will ultimately mean less inflation as people will not have the finances to spend money). Also government spending can be reduced on Health and Roads, this will again have the same effect as less people will have jobs therefore less money is spent.

  2. Peer reviewed

    Explain the possible causes of inflation

    4 star(s)

    In this situation, both prices and economic growth are affected, which is what governments are not looking to happen. Reasons for cost rises comprise a range of areas. For example, an increase in component costs, such as those of the raw materials oil, copper and agricultural products essential for production processes.

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

    The Government can raise indirect tax rates or reduce subsidies which will increase prices. Keynesian economists have argued that a cosh push spiral can develop with leads to a long term cycle of inflation. Consider a developed economy with zero inflation and a few natural resources.

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

    All of the theories of the causes of inflation that have been outlined so far are for demand-pull inflation. It is also possible that the inflation could have been caused by either expectation led inflation or cost-push inflation. Expectation based inflation is where the expectation that there will be inflation causes inflation to occur.

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

    and Ward, D., 2004, p237). Sloman, J. and Sutcliffe, M., (2001, p537) represented this graphically stating 'The AD curve shirts to the right and continue to do so. Firms will respond to a rise in aggregate demand partly by raising prices and partly by increasing output (a move up the AS curve)'

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

    This means that it can be caused by a huge variety of factors, such as when raw materials are imported from abroad and the cost of importing increases then costs rise and prices may to rise to maintain profit margins.

  1. Budget 2004-05 and Economic Analysis of Pakistan

    45312 15332 Miscellaneous 25234 34202 30859 Revenue Receipts - Gross 728371 760983 796323 Less: Provincial Share 214835 211412 239157 Revenue Receipts(Net) 513536 549572 557165 TAX REVENUE (Rs.in Million) 2003-2004 2004-2005 Classification Budget Revised Budget * TAX REVENUE - CBR (I + II )

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

    * Raising mortgage interest payments to reduce homeowners' real 'effective' disposable income and their ability to spend, so as to encourage saving. * Business investment may also fall, as the cost of borrowing funds will increase. Some planned investment projects will now become unprofitable and, as a result, aggregate demand will fall.

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