ANTI-INFLATION POLICIES

Anti-Inflation Policies



Anti-Inflation Policies

Inflation

Inflation is the sustained and widespread increase in prices of goods and services in an economy over time. The increase of a single good or service is not considered inflation. If all prices in the economy increases not only once that is inflation.

Example: The prices of all products. Suppose you live in a country where every week the price of all products up 5 pesos and suppose also that you save to buy a cell phone. For this you have to keep in mind that this increases the price of 5 pesos weekly, ie every passing week need more dollars to buy the same cell. In this example, the price rises steadily, ie every week, and widespread and are increasing the prices of all products.

Unable to track all the prices in the economy, you select a basket of representative products consumed by households in a society. Based on the basket and the relative importance of its products, an indicator is calculated which represents the prices of all products and services in an economy. This indicator is called the price index, which is a measure of percentage change in inflation.

Determinants of short and long term inflation

Inflation negatively affects economic development because it alters the proper functioning of markets, which in turn interferes with the efficient allocation of resources . Therefore it is appropriate to meet its long-and short-term, and the implications they have on the price stability. It is also important to mention that the distinction between the determinants of long and short term is a function of the time horizon that they are slow to impact inflation, thus, the determinants of short-term impact on inflation in periods of less one year, while the long-term take longer.

Determinants of long-term inflation

Excess money

The central bank is responsible for the amount of money available for the purchase of goods and services in an economy, which is known as the money supply. So if the relevant authorities create money beyond what the public demand, the growth of the money supply increases which leads to an increase in the price level and therefore to an increase in inflation.An example of this occurred in Germany in the years 1922 and 1923, when after finishing the first world war in 1918, Germany was forced to pay heavy compensation to the winning nations which caused the Weimar Republic was financed by printing money without no backing causing an excess of money and therefore an increase in inflation.

Fiscal deficit

A fiscal deficit is a situation in which government expenditures are greater than their income. This deficit could be financed with a loan from the central bank. For this, the central bank should increase the monetary base, the latter being understood as the sum of banknotes, coins and the balance of the account only from banks. This would cause an increase in the price level. It is noteworthy that the example of the previous paragraph was also due to a fiscal deficit, as not having the German government tax ...