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Paper Topic:

Why is inflation is an important macroeconomic objective and how it be controlled?


Inflation is an increase in general level of prices of a given kind which is accompanied with the fall in market value or purchasing power of the money and devaluation of the currency . In some contexts inflation still refers to the increase in the money supply , which is one o the cause of the price increases . In different cases , inflation has different causes and origin . That is why it is important to view different types of inflation and , from

this perspective , different methods to control it . Usually inflation is caused by the combination of the following factors

The supply of money goes up The demand for money goes down

The supply of goods goes down The demand for goods goes down According to these factors , economists distinguish between demand-pull and cost-push inflations . Cost push inflation is caused by the decrease in aggregate supply and occurs when the supply of goods goes down caused by the increase in the production cost . This can be due to the increase in wage rates or increase in the prices for raw materials . The most effective way to control the cost push inflation is the direct intervention or prices and incomes ' policy , meaning that government takes the responsibility to measure or restrict the wages and prices With the regard to the certain situation , government uses voluntary or statutory method of intervention . Voluntary kind of intervention means that government through argument and persuasion tries to convince companies to adopt smaller prices and wages . While , statutory method refers to the sharp intervention - government , through the range of the laws , freezes wages and prices on some certain level . Demand-pull inflation , in its turn , is caused by the increase in aggregate demand This can be due to the four factors : increase in any individual factor that influences aggregate demand , increase in money supply , increase in government purchases , or influence of the price increase worldwide . The most effective way to control the demand pull inflation is the implication of the following fiscal policy : to impose higher direct taxes , which will cause a fall in disposal income , to low government spending , and to reduce the amount the government sector borrows each year . This fiscal policy will increase the rate of leakages and decrease the injections into the circular flow of income , and thus reduce the demand pull inflation at the cost of the slower growth and unemployment .The control over inflation became one of the dominant objectives in the economic policy of the government . However , economists underline several main methods among all : monetary policy , fiscal policy , direct wage-income policy , and emphasize the role of the long-term policies to control inflation

Monetary policy refers to the changes in the central bank policy or in bank reserves , designed to influence the interest rate and thus investment , production , and employment . The primary tool of the monetary policy is open market operations . It assumes that government manage the quantity of money circulating...
