Thursday, August 03, 2006

Do you think monetary policy alone is sufficient to achieve a low rate of inflation? (25)

Monetary policy (MP) is the policy that involves the control of money supply (MS) that will affect interest rates, thus affecting the level of investment and affecting aggregate expenditure (AE), which eventually affects the equilibrium income of the economy. This chain effect can be illustrated using the diagrams below.

Photobucket - Video and Image Hosting

The central bank decreases MS from MS to MS1 thus increasing the interest rates from oi0 to oi1. With the increase in interest rates, the level of investment (I) reduces from oI0 to oI1 and this decrease in I lowers AE and if the economy is at full employment at oY1, then the decrease in AE will close the inflationary gap.

However, the MP works only assuming that the demand for money is inelastic and investment is interest elastic. If the demand for money is elastic, the decrease in MS will only lead to a small increase in interest rates that may be too small to affect investment and eventually the equilibrium NY of the economy. Moreover, if investment is interest inelastic, an increase in interest rates will not lead to a substantial decrease in the level of investment, thus not able to affect AE.

An increase in interest rates may also help reduce households’ consumption (C) because if interest rates are too high, consumers may not want to borrow to spend, as they would have to pay back even more. However, this would not be a problem if consumption were dependent on disposable income (Yd) rather than interest rates. Hence MP alone is not sufficient to achieve low rate of inflation and there are other policies like fiscal policy (FP), which can help achieve a low rate of inflation.

FP is the measure taken by the government to either increase or decrease AE and to lower inflation rates, contractionary policy is used. Contractionary FP would include either increasing taxes (T) or decreasing government spending (G).

By increasing T, the amount of Yd of households is lowered and thus they will decrease C, which will lead to a decrease in AE and a decrease in equilibrium NY through the multiplier.

Decreasing G has the same effect as T. Between increasing T and decreasing G, decreasing G would be a more certain policy of the 2 because an increase in T may not necessarily lead to a fall in C especially if consumers are no affected by tax increases. Decreasing G may decrease AE more effectively than decreasing MS given the uncertain impact on interest rates and I.

The increase in interest rates, decreasing G and increasing T are policies that will only work if the inflation is one that is a demand-pull inflation. Since these policies are followed by unemployment and a cost-push inflation is also followed by a recession, these policies will only worsen the recession and hence inappropriate for cost-push inflation.

Cost-push inflation occurs when there is an increase in the cost of production e.g. unions asking for higher wages for their workers, increase in the price of raw materials, which will increase the average total cost of the firm.

This kind of inflation would require supply side policies to lower the inflation rate. Short-term supply side policies include wage-price controls where wage and price increases may be frozen or capped. However, such policies are difficult to implement because it would require the firm to earn less profits, which not many are willing. In addition, there is a huge cost in implementing and monitoring the controls. The controls also lead to misallocation of resources.

Therefore long-term supply side policies are a much better way in lowering inflation caused by cost-push. These policies include increasing education and skills training that will in turn increase the productivity of the workers, which equate to larger output. Long-term supply side policies potentially shift out the production possibility curve, which is what the economy wants to achieve. Another long-term policy would be to encourage investment in the country. This can be done through the government giving tax incentives so that more firms will be willing to invest. Investment in the long term would lead to increase in output thus increasing NY.

MP may be a way to achieve low rates of inflation but it is not the only way as there is also FP in the form of decreasing G that can achieve the same effects but more certain impact. The type of inflation should be in mind also because MP and FP only works if inflation is demand-pull inflation and solutions to cost-push inflation would require long term supply side policies.

13 Comments:

Blogger Shijun Lin said...

shijun 4.4 2
lululemon headbands
abercrombie fitch
louis vuitton outlet
gucci outlet online
jordan 11
christian louboutin outlet
louis vuitton
toms outlet
michael kors watches
oakley sunglasses
michael kors outlet
christian louboutin shoes
lululemon
coach factory
true religion outlet online
michael kors outlet
michael kors outlet
louis vuitton bags
louis vuitton handbags
cheap oakleys
coach outlet store online
air max 95
cheap toms shoes
jordans 9
chanel bags
coach outlet canada
coach outlet store online
ray bans
cheap oakleys
jordan 4s
coach factory outlet
ray ban sunglasses
michael kors uk
fitflop
replica watches
louis vuitton outlet
louis vuitton
timberland outlet
north face jackets
concord 13

10:03 AM  
Blogger chenlina said...

chenlina20150603
celine handbags
ralph lauren uk
coach factorty outlet
ray ban sunglasses
soccer jerseys
cheap oakley sunglasses
gucci shoes
tods outlet
michael kors outlet
cheap jerseys wholesale
burberry sale
christian louboutin sale
kids lebron shoes
christian louboutin sale
adidas outlet
oakley sunglass
hollister
jordan retro 4
coach factory outlet
insanity workout
abercrombie and fitch
celine handbags
gucci bags
coach outlet
louis vuitton outlet
abercrombie
ray-ban wayfarer
burberry outlet
michael kors
christian louboutin outlet
michael kors outlet online
louis vuitton handbags
michael kors outlet
michael kors watches
kobe bryant shoes
hollister clothing
celine bags
hogan outlet
gucci outlet online
coach outlet

11:01 AM  
Blogger chenlina said...

chenlina20150603
celine handbags
ralph lauren uk
coach factorty outlet
ray ban sunglasses
soccer jerseys
cheap oakley sunglasses
gucci shoes
tods outlet
michael kors outlet
cheap jerseys wholesale
burberry sale
christian louboutin sale
kids lebron shoes
christian louboutin sale
adidas outlet
oakley sunglass
hollister
jordan retro 4
coach factory outlet
insanity workout
abercrombie and fitch
celine handbags
gucci bags
coach outlet
louis vuitton outlet
abercrombie
ray-ban wayfarer
burberry outlet
michael kors
christian louboutin outlet
michael kors outlet online
louis vuitton handbags
michael kors outlet
michael kors watches
kobe bryant shoes
hollister clothing
celine bags
hogan outlet
gucci outlet online
coach outlet

11:01 AM  
Blogger Unknown said...

qihang0702replica watches
kate spade uk
ray ban sunglasses
cheap oakley sunglasses
pandora jewelry
kate spade
michael kors
coach outlet
ralph lauren outlet
ray ban sunglass
chanel outlet
gucci uk
oakley sunglass
coach outlet store online
soccer shoes
coach factory outlet
oakley sunglasses outlet
longchamp soldes
christian louboutin outlet
cheap jordans for sale
ralph lauren outlet
ralph lauren uk
burberry handbags
cheap oakleys
ed hardy
ray bans
michael kors outlet online
cheap jerseys
toms outlet
mont blanc pens
cheap beats headphones
cheap ray ban sunglasses
michael kors handbags
cheap ray ban sunglasses
burberry sale
coach outlet online
q

5:14 PM  
Blogger chenlina said...

chenlina20150710
michael kors handbags
coach outlet online
concord 11
longchamp pas cher
jordan pas cher
kate spade outlet
ray bans
true religion sale
kate spade outlet
prada
cheap toms sale for kis
christian louboutin shoes
michael kors uk
ray ban sunglasses
true religion sale
michael kors
michael kors outlet
louis vuitton outlet
chanel outlet online
aviator sunglasses
christian louboutin shoes
michael kors outlet
michael kors
michael kors outlet
jordan retro 11
kobe 9
concords 11
timberlands
air jordan retro
discount oakley sunglasses
cheap jerseys wholesale
abercrombie
abercrombie fitch
michael kors
oakley sunglasses cheap
burberry handbags
abercrombie fitch
christian louboutin sale
fitflop sale
longchamp outlet

10:53 AM  
Blogger chenlina said...

chenlina20150710
michael kors handbags
coach outlet online
concord 11
longchamp pas cher
jordan pas cher
kate spade outlet
ray bans
true religion sale
kate spade outlet
prada
cheap toms sale for kis
christian louboutin shoes
michael kors uk
ray ban sunglasses
true religion sale
michael kors
michael kors outlet
louis vuitton outlet
chanel outlet online
aviator sunglasses
christian louboutin shoes
michael kors outlet
michael kors
michael kors outlet
jordan retro 11
kobe 9
concords 11
timberlands
air jordan retro
discount oakley sunglasses
cheap jerseys wholesale
abercrombie
abercrombie fitch
michael kors
oakley sunglasses cheap
burberry handbags
abercrombie fitch
christian louboutin sale
fitflop sale
longchamp outlet

10:54 AM  
Blogger oakleyses said...

nike air max, burberry outlet, prada outlet, michael kors handbags, ray ban sunglasses, christian louboutin, louis vuitton outlet, ralph lauren polo, longchamp outlet, louis vuitton, cheap oakley sunglasses, uggs outlet, louis vuitton handbags, prada handbags, ray ban sunglasses, michael kors outlet, michael kors, longchamp outlet, oakley sunglasses, tory burch outlet, michael kors outlet online, ralph lauren outlet, replica watches, burberry factory outlet, tiffany jewelry, louis vuitton outlet, cheap jordans, oakley sunglasses, louis vuitton outlet online, kate spade, ray ban sunglasses, uggs on sale, louboutin shoes, gucci handbags, louboutin uk, christian louboutin, michael kors outlet online, michael kors outlet online, uggs outlet, chanel handbags, tiffany jewelry, uggs on sale, nike outlet, oakley sunglasses, uggs on sale, nike free

9:58 AM  
Blogger oakleyses said...

abercrombie and fitch, lunette oakley pas cher, jordan pas cher, michael kors, lunette ray ban pas cher, polo ralph lauren uk, sac guess pas cher, hollister uk, converse, replica handbags, nike blazer pas cher, michael kors, true religion outlet, nike free pas cher, coach outlet, north face uk, hermes pas cher, nike roshe uk, nike tn pas cher, burberry pas cher, north face pas cher, true religion jeans, lululemon outlet, nike air max uk, ray ban uk, true religion outlet, coach outlet store online, nike free, louboutin pas cher, nike air max, michael kors uk, vans pas cher, mulberry uk, longchamp soldes, nike air max uk, nike roshe run pas cher, timberland pas cher, nike air force, coach purses, hogan sito ufficiale, new balance, vanessa bruno pas cher, ralph lauren pas cher, kate spade outlet, abercrombie and fitch UK, michael kors outlet online, true religion outlet, polo lacoste pas cher

10:00 AM  
Blogger oakleyses said...

bottega veneta, hollister clothing, ghd hair, iphone 6s cases, p90x workout, soccer jerseys, iphone 6 cases, instyler ionic styler, asics running shoes, nfl jerseys, vans outlet, mcm handbags, s6 cases, nike roshe run, mont blanc, north face outlet, iphone 6s plus cases, herve leger, valentino shoes, nike air huarache, celine handbags, north face outlet, mac cosmetics, louboutin, softball bats, iphone 5s cases, babyliss pro, reebok outlet, insanity workout, polo ralph lauren, timberland boots, new balance shoes, abercrombie, hermes handbags, iphone 6 plus cases, jimmy choo outlet, beats by dre, oakley, longchamp uk, lululemon outlet, giuseppe zanotti, iphone cases, abercrombie and fitch, salvatore ferragamo, nike trainers uk, chi flat iron, ipad cases, soccer shoes, wedding dresses, nike air max

10:02 AM  
Blogger oakleyses said...

hollister, swarovski jewelry, barbour jackets uk, pandora charms, canada goose pas cher, louis vuitton uk, ugg uk, converse, moncler, louis vuitton, supra shoes, moncler, swarovski uk, pandora jewelry, lancel, canada goose, sac louis vuitton, marc jacobs, wedding dresses uk, juicy couture outlet, moncler, karen millen uk, toms shoes, ugg,ugg australia,ugg italia, moncler jackets, doke & gabbana, canada goose uk, canada goose jackets, canada goose outlet, sac louis vuitton, ugg pas cher, louis vuitton, pandora jewelry, gucci, coach outlet, moncler pas cher, bottes ugg pas cher, converse shoes outlet, canada goose outlet, moncler uk, ugg,uggs,uggs canada, hollister, montre pas cher, vans scarpe, ray ban, juicy couture outlet, replica watches, links of london uk, canada goose, nike air max, moncler

10:03 AM  
Blogger chenlina said...

chenlina20160613
louis vuitton outlet
michael kors outlet
jordan 11 concord
basketball shoes
louis vuitton outlet
timberland boots
louis vuitton outlet
christian louboutin sale
louis vuitton purses
michael kors outlet
asics outlet
adidas shoes
cheap jordan shoes
michael kors uk
coach outlet store online clearances
michael kors handbags
nike uk
lebron shoes
nike air max 90
louis vuitton outlet
abercrombie outlet
ray ban sunglasses
louboutin pas cher
tory burch handbags
michael kors outlet clearance
michael kors handbags
coach outlet
nike air max
hollister kids
christian louboutin outlet
michael kors outlet
michael kors outlet
instyler max
insanity workout
christian louboutin shoes
jordan 3
nike uk
toms outlet
jordan 8
polo ralph lauren outlet
as

11:40 AM  
Blogger dong dong23 said...

timberland boots
michael kors outlet
louis vuitton handbags
toms shoes
nike roshe run
louis vuitton outlet
toms shoes
christian louboutin shoes
cheap jordan shoes
cheap nfl jerseys
cheap jordans
true religion outlet
michael kors outlet
adidas originals
kate spade
michael kors outlet online
gucci
jordan shoes
michael kors handbags
louis vuitton
polo ralph lauren outlet
jordan 3 infrared
ed hardy clothing
ghd hair straighteners
christian louboutin sale
oakley sunglasses
jordan 4 toro
toms shoes
adidas originals shoes
michael kors handbags
michael kors outlet clearance
coach factory outlet
ray ban wayfarer
coach outlet
longchamp handbags
true religion outlet
cheap oakley sunglasses
louis vuitton outlet
louis vuitton outlet
vans shoes outlet
20168.1wengdongdong

5:57 PM  
Blogger Mie Helal said...





Keep it up
http://www.prokr.net/2016/09/furniture-moving-company-hail.html
http://www.prokr.net/2016/09/furniture-moving-company-hafar-al-batin.html
http://www.prokr.net/2016/09/furniture-moving-company-khamis.html
http://www.prokr.net/2016/09/furniture-moving-company-tabuk.html

5:41 PM  

Post a Comment

Subscribe to Post Comments [Atom]

<< Home