Inflation Policies Flashcards
What are the policies to solve demand pull inflation?
1) Contractionary monetary policy by increasing interest rates. Best suited policy.
2) Contractionary fiscal policy by reducing GS or increasing taxation. Fiscal policy will be unlikely to work in this case since its the BOE that can influence inflation and they use monetary policies.
Evaluation of policies to solve demand pull inflation
1) Conflicts of objective. Reducing inflation for the cost of lower economic growth and higher unemployment. This can lead to a recession.
2) Impact on investment. Increasing interest rates may detract investment. Cost of borrowing increases for firms as well and this is not good for SR and LR growth.
3) Impact on debt. As interest rates increase, values of debt increases as well. Indebtedness struggles.
4) Increasing interest rates can strengthen exchange rate. Imports will be cheaper and this increases current account deficit.
What are the policies to solve cost push inflation?
1) Implementing/reducing inflation target. This will reduce the amount that wages rise so workers wont be able to bargain as much. This is because they think inflation will be around the target.
2) Reduce VAT/Subsidies for firms. This will lower the costs of production.
3) Intervening in the forex market to strengthen the exchange rate. This is so importing becomes cheaper.
Evaluation for policies to solve cost push inflation.
1) SRAS shifts are mainly caused by short run factors so maybe changes like higher raw material prices wont last long.
2) Subsidies and reducing VAT can harm the government finances.
3) Intervening in the forex market is not always possible because many countries have floating exchange rates.
4) Maybe its better not to intervene as we cant solve it. For example, we cant do much to reduce raw material costs.
What policies do we use for high long term inflation? and why this?
We use interventionist or market based supply side policies.
This is because the economy dosent have enough spare capacity, so inflation lasts long.
Evaluation for polices to solve high long term inflation.
1) No guarantee of success in increasing LRAS
2) Can be very costly. Especially interventionist policies
3) Time lags
