Inflation - An explanation with examples on how governments can reduce or prevent it

Thèmes abordés

Inflation-economy

Résumé du document

Inflation has been a burning issue throughout the centuries. The world is currently going through its biggest financial crisis since 1929. While certain countries including Greece and Ireland find themselves on the verge of bankruptcy, inflation seems to have been stabilized in the other parts of the globe. It appears that economists and governments have learned from the crisis of 1929 and have been able to use this information to control the current situation. However, inflation remains a controversial subject and there have been many schools of thought put forward such as those by Keynes, and the rational expectations theory. The question facing the how governments is how can they reduce or prevent inflation in the most effective manner? At this juncture, let us note that "the rate of inflation in an economy is the rate at which the general level of prices in that economy changes. It is the proportionate change in the general price level per unit of time". (J.S Flemming, 1975:5). In this essay, the main factors of inflation will be explained. Subsequently, its consequences will be discussed. Finally, the different ways to fight inflation will be analyzed.

Extraits

[...] An explanation with examples with how can governments try to reduce or prevent it? Inflation has been an issue throughout the centuries. The world is currently going through its biggest financial crisis since 1929. While certain countries are beginning to go bankrupt, such as Greece or Iceland, inflation has been stabilized. It appears that economists and governments seem to have learned from the crisis of 1929 and have been able to use this information to calm today's situation. Inflation is still a controversial subject and there have been many schools of thought put forward such as those by Keynes, and other views and the rational expectations theory. [...]

[...] (1977). Inflation. Oxford: Oxford University Press. Hearl, P.H. (1975). Analysis of inflation, United States of America: Georgetown University. Gregory Mankiw, N (2000). Macro economics fourth edition, New York: Harvard University. [...]

[...] It will now explain in which way governments can fight inflation. First of all, it is important to know that today; the governments in the 16 countries which are in the euro-zone do not have any power to control inflation. Indeed, it is the European central bank which controls the key rate: The lower it is, the more the risk of inflation increases. The principle is the same in the United Kingdom; however, the key rate is controlled by banks while in the “euro-zone” it is an independent organism. [...]

[...] Once again, the economic equation of “demand and supply” will determine the price level. So, the more countries that create, the more the value of the money will decrease, and more prices will reach a high level. much money chasing too few goods” (P.H Earl; 1974:3). Finally, the third cause of inflation is the enhancement of production cost. Indeed, if the costs of raw materials increase, logically, the final price of the product will increase. For example, recently the price of the oil has risen in an unexpected way. [...]

[...] Indeed, it various causes of inflation exist such as the excess of monetary creation or the rise of production cost which can have important economic consequences but it could also caused dramatic social event such as in Germany before the Second World War. To avoid inflation, certain economists point out the concept of deflation which is the opposite of inflation in this case, a fall of prices. However, like inflation, deflation can have fatal consequences since it discourage investments and consumption. To conclude, we can see that the government must keep a stable economy by fighting as well as discouraging the deflation. Bibliography Flemming, J. [...]