Inflation targeting means Central Banks are responsible for using monetary policy to keep inflation close to the agreed target (usually around 2%). Since the mid-1990s, inflation targeting has become widely adopted by developed economies, such as UK, US, and the Eurozone. Inflation targets were introduced to help reduce inflation expectations and help avoid the periods …
Readers Question: What is the relationship between inflation & economic growth? If economic growth is caused by aggregate demand (AD) increasing faster than productive capacity (LRAS) – if economic growth is above the ‘long-run trend rate‘ then economic growth is likely to cause inflation. If economic growth is caused by increased productivity (LRAS), then the …
A devaluation leads to a decline in the value of a currency making exports more competitive and imports more expensive. Generally, a devaluation is likely to contribute to inflationary pressures because of higher import prices and rising demand for exports. However, the overall impact depends on the state of the economy and other factors affecting …
A key factor in determining inflation is people’s expectations of future inflation. If firms and consumers expect future inflation then it can become a self-fulfilling prophecy. If workers expect future inflation, they are more likely to bargain for higher wages to compensate for the increased cost of living. If workers can successfully bargain for higher …
Readers Question: Is rise in prices a reflection of economic growth? A sustained rise in prices is known as inflation. A large rise in prices / higher inflation rate is often caused by economic growth. However, there are also occasions, when we can get inflation despite weak or negative economic growth. Inflation caused by economic …
Definition: The money supply measures the total amount of money in the economy at a particular time. It includes actual notes and coins and also any deposits which can be quickly converted into cash. There are different measures of the money supply. Narrow Money e.g. M0 = This is the level of notes and coins …
Nearly all economists advise keeping inflation low. Low inflation contributes towards economic stability – which encourages saving, investment, economic growth, and helps maintain international competitiveness. Governments usually target an inflation rate of around 2%. This moderate but low rate of inflation is considered the best compromise between avoiding the costs of inflation but also avoiding …
Readers Question: Evaluate the potential cost and benefits to the UK economy of adopting the Euro.” Costs of Joining the Euro Loss of independent monetary policy. In the Euro, interest rates are set by ECB but may be inappropriate for UK economy. For example, the 2008 recession hit the UK harder than other European countries …