essay- the policies needed to fight inflation

inflation is defined as 

• high price levels in an economy that cn cripple and crush economic growth like in Zimbabwe or Venezuela 
• when prices of everything increase faster than the wage level and GDP causing a conflict between objectives
• a sustained increase in the general levels of prices in an economy 
• the price increases measured by the PPP which measures price, productivity and profitability - the key drivers of an economy 

Inflation tends to occur 

• during a recession because firms make big profits while pushing wages to low levels and their spending can push up prices over time 
• during the intermediate stage  of the AS curve when prices reach around 3% and unemployment is low 
• when the economy reaches the limits of its PPC and factors of production or have increased cost of production usually in a boom 
• when there are too many good for the money and so people have to compete to get what they want 

the most common type of inflation is 

• demand pull where the AD  is less than AS and so prices are pulled down to meet consumer demand 
• demand pull where optimism is high, world demand for exports is high and AD is greater than  AS 
• demand pull where the demand for labour pushes up the cost of production and creates inflationary pressure 
• demand pull inflation where overseas people are repaired to pay more for australian exports because they are in such high demand - like the mining boom 

this is usually a result of 

• high  OS demand for X , major I spending and high levels of consumer and business confidence leading to speculation 
• the government increasing the cost of production and borrowing to stop consumers and business creating an inflationary spiral
• the AS and LAS curve shifting left and this causes aggregate demand to decrease
• external forces that are beyond the control of a government like the GFc or wars 

another common type of inflation is cost push inflation which is caused by  

• higher inflation rates in other countries so it is passed on 
• increased costs of production which shift the AS curve to the right 
• increased cost of production which shift the SAS to the left
• when export prices push up domestic prices because they are dearer than in the domestic economy 

the impacts of  cost push inflation are 

• higher prices and increased economic growth 
• higher prices and decreased structural unemployment 
• higher prices and increased cyclical unemployment 
• higher price s and full employment 

in two speed economies there is a risk of 

• cost push inflation  
• supply side inflation
• demand pull inflation 
• stagflation

this can be caused when 

• some parts of the economy are thriving like the mining boom and other parts suffer with inflation 
• long term unemployment and hyperinflation combine to create difficult economic conditions the government can't fix 
• external shocks like war cause imports to replace domestic production and cause unemployment 
• some parts of the economy have strong economic growth while other sectors struggle with stagnant growth 

the success  of this policy is generally 

• effective if the level of inflation is not too high and government is prepared to risk political backlash
• only possible if supply side policy to deal with the frictional and seasonal UE is combined
• only when applied by liberal governments who have price stability as a high priority 
• determined  by external forces who will determine how effective any policy will be 

the purpose of this policy is to

• reduce the level of AD and to make people spend less 
• decrease the AD curve and the level of C, I and inflation 
• to make borrowing more expensive so people stop spending 
• to reduce imports so domestic producers have less competition