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Inflation is the inevitable result of economic growth. However, the high inflation will also threaten a country’s economy to grow stably. Australian government and Reserve Bank of Australia’s official target is to keep inflation rates between 2-3 per cent per annum.

If the inflation rate above the RBA’s target, it would cause three types of concerns to economy and society, they are output effect, means the output will fall when prices increase; income redistribution and wealth effects, means inflation makes somebody better off and others worse off; and the effects on international competitiveness means a country becomes less competitive in global economy when its exports fall and imports increase during inflation.

RBA can use contractionary monetary policy to decrease the inflation pressure. This can be achieved by combing the open market operation and transmission mechanism. Eventually, the inflation pressure will fall when the aggregate demand and expenditure decreased.

Introduction

Inflation is an inevitable consequence associated with economic growth; however, it would also threaten a country’s economy to grow if it was too high or above its target. This paper will basically discuss the concerns caused by high inflation, followed by the evaluation of policies can take to adjust this situation.

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-concerns when inflation is above RBA’s target

                                                                 

        Figure1 (Bernanke,B.S & Olekalns, N & Frank,R.H 2008,P315)

Inflation, is the tendency for the overall level of prices in an economy to rise through time (Bernanke,B.S & Olekalns, N & Frank,R.H 2008). The graphs above show the process of how the inflation occurs. Australian government and RBA agreed to target inflation rate of 2-3 per cent on average (Day, 2009, p40).

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When inflation rate is above RBA’s target, it will cause concern for both the economy and society. The concerns/effects of inflation can be broadly categorized into three areas; they are output effects, income redistribution and wealth effects and effects on international competitiveness.

  • Output effects

The presence of inflation can have impact on output level is explained by the uncertainty. Continual price raises lead to uncertainty about future and thus make decision-making more difficult for investors because investments seem more risky during high inflation, thus investors may stop investing during inflation for guaranteeing their rate of returns.

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