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Monetary control Essay

Inflation in an economic perspective is measured as a growth of the money supply in an economy, without a general increase in the supply of goods and services. The end result of inflation is rise in the general price level. There are three major types of inflation: Demand-pull inflation, cost push inflation and built-in inflation. The demand pull inflation is caused by an increase in aggregate demand due to increased private and government spending .

The cost push inflation is caused by drops or reduction in aggregate supply due to increased prices of inputs. For example a sudden decrease in oil production will lead to an increase in oil prices. Consumers will therefore buy the oil at a very high price. The built-in inflation is caused by increase in the wages of workers in a given country. The government of U. S. , Germany, Australia, India and China because of the various problems it brings to their economies is currently addressing the issue of inflation.

There are three main problems caused by an increase in inflation. First if inflation is high in a particular country and the same country maintains fixed exchange rates with other countries it means that its export will

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be relatively expensive such that other countries will not be able to purchase them. This in the long run will create a deficit on the country’s current account since most of its exports will not be accepted. There is fear in these countries that trade unions will demand higher wages to keep up with the rising inflation.

People will put high expectation on their wages because of the increase in inflation. If proper measures are not taken, the workers may end up going on strike and this will automatically lead to a decrease in productivity of the country. In the case of collective bargaining the wages will be set as a factor of price expectations and this will be high if the inflation rises. People on a fixed income are disadvantaged especially when prices are high. Their purchasing power will be down therefore the gross domestic product of that country will also below.

In order to address the issue of inflation as a major draw back to the country’s economy, the government should therefore come up with effective policies and strategies of controlling inflation. This report therefore presents the various ways of controlling inflation by U. S. government. The central bank of china has said that it is working on various ways of controlling the rate of inflation. In the last two months inflation rate moved from 5. 6% to 6. 5% and the increase is expected to increase month after month (Christine and Alok, 1995).

Inflation is always and everywhere a monetary phenomenon therefore to control inflation the government needs to control the money supply in the country. Money supply explosion has been identified to create a loss in the purchasing power of a dollar in the U. S economy. Monetary control works indirectly on inflation by lowering economic activity. Import prices should be set low in order to reduce inflation. Introduction: Controlling inflation has become a major concern by many countries including U. S, Germany, China and many other countries.

Effective policies to control inflation should specifically pay attention on the various causes of inflation in the economy. One of the major causes of inflation is the excess demand for goods and services . The government policy that is to be tabled should therefore aim at reducing the level of aggregate demand. Just for instance if cost-push inflation is the root cause, the production costs need to be controlled for the problem to be reduced otherwise without proper policies laid to government then inflation will still be the major government issue causing a big problem in the business environment and an economy.

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