polciies to reduce inflation Flashcards
what is the macor econ obj for inflatino
low and stable
hit target 2+-1%
policies to bring inflation to target depend on
type of inflation
what policy can we use to bring down inflatino
contractionary
monetary and fiscal policy
why is contractionary fiscla policy to target DPI unlikely
its central banks job in econ to use omentary policy to bring inflaiton to target
why is monetary policy more likely to target inflation
ir got many avenues to feed through to econ herfor emore liekly to have an impact in affecting AD to reach inflation target rate
cb independent from gov therefore theyre more transparent , trustworthy and successful i gettign to inflaitno target
how do we draw contractionary Moneaty and fiscla policy on diagram
shift ad left
from lras line
reduce price levle - we see reduction in demand pull infltion
y - price level
x- rgdp
what ar ehte 4 eval point for using monetary and fiscla contracionary to reduce dpi
conflict of objectives
impact on ivnestment
impact on te indebted
strong er and ca deficit
explain conflict of macro objetoves
yes we see reduciton in dpi
but at a cost
leads to lower econ groeth - hihg unemployment which could lead to recssion in econ which isnt desirable
not desirable as macro all about achievein macro econ obj at the same time
explain conflict of macro objetoves
yes we see reduciton in dpi
but at a cost
leads to lower econ groeth - hihg unemployment which could lead to recssion in econ which isnt desirable
not desirable as macro all about achievein macro econ obj at the same time -w hcih cwe loose i use contractionary MP
EXPLAIN eval impact on investmetn
high ir detract I as increases COB
bad news for sreg and lreg
lreg rates will be lower
we also get issues liek lower productivity and worsening of ocmpetitiveness of econ
we dont want these -ve side effects
explain eval of impact on indebted
when we say indebted taling about hh and firms with lots of debt
if IR go up - hh may default on loans- go bankrupt and become homeless potentially their living standrads suffer - may get assets taken away from em
is bs default on loans they could go bankfrupt creating unemployment - decrease SOL / they may pass on prices whihc can cause CPI whihc is hard to slow and result in stagfalion
explain eva of strenghten er and current account deficit
stregnthen ER which could widen CA deficit
as higher ir mean hot money inflows which strenghtens pound as more dmadn
SPICEE
Not good if youre a trade econ e.g china and japan + african
this cna elad to further conflict of macro obj
but if goods inelastic this cna be good for developemtn
to recify cost push inflation we need policies that
target cuases of cost push inflation
how do we show cost push inflation
sras shift left
what are the ways we can reduce cost push inflation
implement/reduce inflation target
reduce vat/subsidides to firms but ….
intervene in forex markets to strenghten the ER - but….
explain implemt/reduce inflaitn target
good idea cause will reudce the amount wages rise in the economy
cuz workers will think yearly inflaiton is gonna be target so wage bargainnig wikll be at that rate
therefore you can limit extent to whihc rages rise on a yearly basis and bring inflaitno down yearly
this is smart if wages are the dominant reason for higher inflaitno
explain reduce vat ir subsidise firms
we cna cut vat / subsidies firms
this reduces their cop whihc cna bring inflaiton down as lower prices
but depends if past savings onto customers and econ if not pointless - some may use highe rprofit margns to rewards sh or be inefficne t
but also big cost to gov and can worsen gov finnces
+ there is no way goc gonna offer subsidies to all firms in econ- this is ludicrous idea
vat wierd to
this is all yes in theory relaity elsewise
explain interbening in forex markets to strenghten ER
IF WEAK er driving up the price of raw materials and leading to cost push infaltion
in theory cb cna interven in forex mkt to strnehten er
spicee
if imports cheaper can reuc price of imported materials and reduce COP for firms who import RM
BUT IN THEORY YES , in reality ludicrous as many cunch in world got freely floating ER so this wouldnt occur in relaity
depper eval for CPI
we need to think about the cause
lots of causes often ST bouts e.g high rm prices
rm prices odnt stay high forever
e.g weak ER increase rm wont stay forever
er strenghten on own whihc can get rid of cpi
sometimes we cant do anything about them therfore we shoulnt worry and try impltm polices that got horrible side effects
e.g cnat do anything if rm is high
so with cpi dont worry as much as often st cases + we cant do much about them
so just gotta wait it out and let it ocme back down naturally
high lt inflaiton rates becuase
econ doesnt have enoguh/low levels spare cpapcity
how do we rectify lt inflation rates
supply side policies
why do we rectify high lng term inflation rates with supply side policies
increase productive cappacity of eocn - increase LRAS to reduce pressure on FOP consitleynt and reduce lt rates of inflaio
how do we show supply side polciies to rectify infltino
shift lras right
reduce the price level
increase productive capacity of the econ
increase econ growht
list the ssp
interventionist
market based
eval ssp for rectify high lt growth rates
no uarantee of success - esp interventionst ssp
cost- also -ve stkh impact if mkt based ssp used
time lags - time before htey shift lras - therfore of need to get inflatino down quickly we wont necessarily see it
what is the key eval point
type of inflation
in realoty hard sometimes ot dissect and know what type of inflation is dominating and pushign inflation rate beyonf target
therfore range of policies need to be used to control inflatino overall
there isnt much neceesarily you can do about cost push inflaiton
rate of inflatino - obj low and stable 2% if inflation is around there we dont need policies to reduce inflatino
inflation gets too low and into defaltion teritory major issues
