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The rate of inflation in the UK

Task 1

The below table has shows UK inflation rate since 1985 to 2009.

YEAR

INFLATION RATE

2009

2.17%

2005

2.10%

2001

1.20%

1997

1.80%

1993

2.50%

1989

5.20%

1985

6.10%

The above graphic represent quarterly years inflation rate has written in vertical line and different year since 1985 to 2009 has had horizontal line. There were gradually decrease inflation rate since 1985 to 2001 as well as inflation rate was slightly increased from 2001 to 2009 .Firstly, in 1985 in inflation rate was 6.10%.In 1989 , 1993, 1997, 2001 inflation rate was 5.20%,2.50%,1.80% and 1.20% respectively. However, in 2005 and 2009 inflation rate risen 2.10% and 2.17 correspondingly.

Task 2

Inflation is increase of the general level of price in particular period of time. If the supply of the money increases then the price also increases. In general view inflation is the increase of price and wage and decline the purchasing power. It’s generally measures by the change of consumer price index. In simple meaning of inflation is there is no power of money to purchase a good and service. In example if you are buying a basket of foods in same shop where you were buying from last six month now same basket of foods is more prices then it called inflation. Same food same shop but price different it means the money power is gone down and goods power gone up. When the price level goes up, each unit of currency buys fewer commodity products and services; however, in inflation time purchasing power of money has decrease.

In Keynesian point of view price is directly not affected by money supply. But the supply of money plays the vital role and there are some others factors also depend on it. In Keynesian point of view there are three types of inflation

Demand pull inflation:-

Cost push Inflation:-

Built in inflation:-

Demands pull inflation:

Demand for commodity goods and service goes up which could have Increasing in the money of supply, in government purchases, and price level of commodity goods and services that called is demand pull inflation. It is known as aggregate demand. Hence, any factor that increases aggregate demand can cause inflation.

Cost push Inflation:-

Being, Caused by increases in wage rate and increase in the prices of raw materials .i.e. decrease in aggregate supply. Rise in the cost decrease the profit margin and some company will go on in liquidation. It’s also happen by the natural disaster. Accidently, decrease in the supply of oil, gas can cause the natural disaster. It’s depends on wage costs, profit margin, import price of the goods.

Built in inflation: - It’s related with the cost push inflation in this inflation worker always depend on their wages, and profit. Up there prices and the firm pass their higher labour costs on to their customers as higher prices.

So in Keynesian theory inflation depend on supply and others related factors. This is the financial policy comprises in government expenditure. Keynesian economist believe that in so far as there is a relation at all between the level of activity and the value of inflation the relation does not depend on the character of the economics forces responsible for any particular level of quantity.

Here are the monetarist views

2 Monterey views: - Monetary view is depending on the money supply and it depends on the macroeconomics .monetary views are the more effective tool of demand management. Monetarists argue that there was no inflationary investment boom in the 1920s.

According to Monetarist equation

M.V = P.Q, Where as

M = nominal quantity of money.

V =  velocity of money in final expenditures;

P = general price level;

Q = index of the real value of final expenditures;

Where, the general price level related to the real value of nominal quantity of money (m), velocity of money (v) and the index of the real value. The formula is an identity because the velocity of money (V) is defined to be the ratio of final nominal expenditure () to the quantity of money (M).

They think that monetary of money is not affected by the monetary policy. And the value of output determined by the productive of the money.

There are many causes for inflation. Inflection can be create when the government print an excess of money to deal with a crisis price end up rising at an extremely high speed to keep up with the currency surplus. Another cause of inflation is a rise in production cost which leads to an increase in the price of the final product. When the raw material increases the price this leads to the cost of production increasing. Another cause has in the international lending and national debts. If the country borrows money then they have to deal with the interest rate in the end cause prices to rise as a way of keeping up with their debts. If the federal taxes increase it also cause the inflation. Likewise if the customer product such as tobacco or oil taxes increase then they will lose the costumer which also causes the inflation.

Task 3

Basically, the government affected by inflation that times somebody get benefit and loser. As like follow

Someone who holding their assets i.e. cash it give rates of return less than inflation rate. A substantial increase in inflation will have decrease of real value of purchasing power of money. Who keeps all his money under bed that person can’t buy real value of commodity goods and services. For example, if somebody has £ 200 that time inflation rate goes on 10 % high then they have to pay £220 because rise of 10 % inflation rate. It means they lost 10% of his purchasing power of money.

Investors who have borrower loan on fixed rate of interest at current price of inflation such type of borrower get benefit. Obviously, while inflation rate has risen the interest rate is high. But investor invests short term, bond, and share commodity goods and services .At the time commodity goods and services prices have been increasing .So investor get profit from their company. After inflation rate will have reduce then who are purchase assets .i.e. land building and machinery that investor get more benefits due to assets value always increase. In this condition Investor could be big winner.

Likewise if customer takes loan from bank they do not have to get benefits. In the Inflation time goods and services price always high instead customer has to pay more money for commodity goods and services as well as high interest rate paid to bank.

Savers, pensioners, consumers, first time home purchasers, those who have credit card and long term bond are the mostly affected by inflation while rate has been raised and they are losing their money. If government affected by inflation government want to cut social benefits .i.e. Who have a fixed income that person always losers .Moreover salary, pensions, child benefits, earners are increase at less than inflation rate they are loser. UK government had to cut benefits different sector for purpose reducing government expenditure and paid to World Bank loan.

Task 4

When general price of level increase there is customer get fewer goods and services that period of time .Inflation always destroyed of purchasing power of money. The government tackle inflation for following reasons.

Government always control supply of money. If money of supply has over then definitely become inflation. In the inflation time poor people always poor and richer people always richer. So government monetar supply of money while money of supply over. In inflation time customers get fewer goods and services because decline of purchasing power of money. Poor people couldn’t afford like daily food, living cost, clothes and entertainment cause they don’t have to pay money due to inflation.

On the other hand, rich people have been richer in inflation time. What they do invest money in share, land, gold, and bond. And who investment this found they got the return on the investment.

Generally, trade union force increase wage of worker in the company. Company increase price produces commodity goods and services due to rise of wage of the company workers while decline purchasing power of money then government should tackle inflation

Appositive relationship between inflation and unemployment .where rise inflation then unemployment rate has risen because investor losing his purchasing power of money and they don’t want to investment. Likewise inflation rate decline employment rate has risen that period of time. Where unemployment rate has goes up people can’t afford goods and service while people losing job. Then government could control inflation.

If government having face inflation problem then government will be do control. These remedies are as follow:

If inflation rate has risen by demand then:

Government cuts income tax and increase to incentive work

Central bank rise the interest rates

Cuts social benefits, e.g. child, unemployment, etc and to encourage people to work.

Cuts the government expenditures in order to private sector for example in the UK new government has been cutting public sector job it means reducing the expenditure and fulfil government loan.

If inflation is high cause by high costs:

Government can do increase wages of worker which is higher than inflation rate.

Increase of value of money.

Reduce Profit margin of the organization.

Control importer price of goods and services.

However, government could be control monitory polices where as less print money note and cash withdraw from reserve bank for certain period of time. Or central bank holds certain percentage of money who deposited in bank.

Task 5

The classical economist had said, supply side economics is primarily related to production or supply of goods and services whilst supply creates its own demand. According to the Supply side economic theory, production or supply is key to economic prosperity and that the consumption or demand is merely the secondary consequences. Therefore, Supply side economics is defined as one of the principle of macroeconomics that argues, economic growth can be most effectively created by lowering the barriers, such as adjusting income tax and economics gain tax rates, for people to produce and supply goods and services, and by allowing the greater flexibility by reducing regulation so that the consumer will benefit from greater supply of goods and services at lower prices.

UK has such type of experienced a supply side rebellion since 1980s and 1990 mean while government adopted this police and increase efficiency of labour and capital.

Supply side economics have included as follows:

Government give facilities to firm like decrease of tax at raw materials where as firm produce more products.

Utilize fund to the public sector while people get easily job.

0 Y1 Y2 National Output

P1

AS1

AS2

P2

Price Level

Figure 2.

From the above figure it can be said that the successful supply side policies have a positive effect on production or supply, increasing the aggregate supply curve, shifting it downwards and to the right from AS1 to AS2. As a result there rises the equilibrium level of national output from Y1 to Y2 and reduces the average price level from P1 to P2. Hence, it helps in more supply of goods and services at lower prices in the market.

In the 1980s USA government cuts tax rate and benefits, to incentive to work as well as produce goods and services. Those countries who use supply side economics there will be create massive demand due more production .Employment rate has dropped that period of time. Job will be created and income level is high. Reduce power of trade union while worker has been got good wages.

Task 6

Nowadays, many countries heavily affected by recession the main cause behind inflation .The World Bank economic units worry about this condition. Inflation always reduces general purchasing power of money .At that time consumer can’t buy real value of commodity goods and services. In the context of UK since 1985 to 2001 inflation rate was slowly decrease .Similarly, since 2001 to 2009 inflation rate was increase little bit .The table of continent include:

1.Investigate the rate of inflation in the UK since 1985 to 2009

2.Describes of inflation and causes of inflation

3. Effect a Substantial increase in inflation

4. Why Government wants to tackle inflation and different types of remedies 5 Definition of supply sides of economics and 2 countries evidence

Generally, inflation reduces of the monetary value over a period of time where currencies get fewer goods and services. Decrease of aggregate supply and increase of raw material price are the main causes of inflation. Where 5% inflation rate has rise their customer have to pay extra 5% due to increase of 5% inflation rate. And some of winner and some of loser that period like investor, shareholder, and stock holder are the big winner .Instead saver, consumer, benefits holder (i.e. child, unemployment benefits), and credit card holder are the loser. Government want to tackle inflation .If reduce in inflation cause supply of money government control print less money. Furthermore, if inflation had high causes by demand rise of interest rate.

Supply side economics focus production of commodity goods and services automatically supply creates its own demand. Where supply side economics has success full launched in 1980s and 1990s in the UK. There were government cuts social benefits and investment fund productivity sector while job will be created and workers income level will have rise.

References

http.enwikipedia.org/inflation access on 25/08/2009

I Stephen and W Stuart (2007), “Economics”, 7th edition, Great Britain by Ashford colour press, Hampshire

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