By.Azeb,Amaaaaaan,Keeeeeith

MACROECONOMIC PROBLEMS

Inflation Inflation refers to a situation where the there is a general

and sustained increase in all prices which generally affect the everyday consumers or Inflation is the general rise in the prices of goods and services over a particular period of time.

An increase in a small number of prices does not constitute inflation

Recording inflation generally involves using indices The government records inflation

The use of CPI Date (inflation) It acts as an economic indicator : It can be used to measure

the purchasing power of the people and a measure the cost of living

As a price deflator : This affects the value of money so taxes,interest,pension,profts,wages etc these vary based on the value of money so with measuring the inflation rate these can be stabilized

How to measure inflationThe rate of inflation affecting an economy is measured by

calculating the average price change in the prices of all goods and services. However it is hard to obtain up-to-date price information on the millions of different goods available, a basket of goods is chosen which includes the goods and services generally purchased by a typical family or house hold.

How to measure inflation CPI Base Year For a particular good the weekly proportion of the salary spent is

multiplied by the average cost, this gives us the weighted average cost, this is done for all products, the total weighted average price is taken out and this is used to compare to the future years

Years after the base year The same procedure is carried out and the difference between

the base years weighted average price and the new weighted average price is the inflation affecting the economy.

How to measure inflation (2)

The main cause of inflationThere are various factors which cause

inflation and there are also different types of inflation but the three main causes are

MONETARY INFLATIONCOST PUSH INFLATIONDEMAND PULL INFLATION

The main causes of inflation (2)Monetary inflation : when the rate of growth in money supply is not matched with the growth in output.

A real life example of this would the case of Zimbabwe where after the civil war it had destroyed Zimbabwe's production capabilities where then the government tried to re-enforce stability by printing more money the recorded inflation rate in Zimbabwe would be 231,000,000% Bread = 10 billion Zimbabwean dollars $Average income = 100 Billion $ (Estimated value 30 cents per month)

Main causes of inflation (3)Cost push inflation : This is when prices are

forcedly pushed up which could be due to the scarcity,resrtiction of supply or other reasons another example of this would be imported inflation for eg. Most developing economies rely on imported oil so if there is an increase in the oil price there will be a substantial increase in goods which require oil to work thus resulting in inflation

Demand pull inflation : This is when there is an increase in the total aggerate demand for goods and services in an economy if the demand cannot be met then it will cause prices to rise upwards for ex if an act or athletic team, etc. gets more popular, the cost of their tickets on the open market goes up even when the underlying ticket prices haven't changed.

Consequences of inflationThere are various consequences of inflation and those consequences depends on factors such as the rate , whether its accelerating or rising , expected rate and how it compares to other countries.The worst form of inflation would be hyperinflation which is an abnormal increase in the price rate.

The best example of hyper inflation would be in Germany between 1921-1923 where the inflation rate was 757 million% this was because the government needed to repay debts of world war 1. In order to counter this the government implemented taxes it is said that every penny was going to the government and printed more money to repay its debts which in then decreased the value of money people also stopped dealing in money and resorted to barter where cigarettes were the form of trade used between consumers and suppliers. However Germany was able to get out by adapting a new currency and selling its gold reserves and seeking a loan

Inflation cannot be avoided but instead the government should try its best to stabilize the price the preferable inflation rate would be 1-5%

Consequences of inflation (2)

Why is accelerating inflation rate bad ? If there is an accelerating inflation rate then this may cause employees and workers to demand higher wages which will in then either cause the price of products to rise as the cost of factors of production will rise or may result in unemployment since firms will look for more cost effective ways to remain competitive.

Anticipated rate versus unanticipated rate Anticipated rate is when the inflation rate is close to the expected inflation rate and unanticipated is when its either higher or not unexpected the number of problems allocated with this are that it creates uncertainty and investors may stop investing so this affects the balance of payments and economic policies may backfire or prove to be ineffective.

International price competitiveness Inflation causes the price of domestic products to rise which in then causes the price of exports to rise thus making them more un-competitive as the exchange rate will very.

Consequences of inflation (3) It erodes the value of money and assets thus decreasing the

purchasing power ultimately reducing economic growth in a country Inflation can create a random redistribution of income given that

inflation does not have an equal impact on individuals and groups. For example, individuals who can protect their earnings or their assets from inflation will increase their income relative to those who cannot. Similarly, borrowers do better at times of rising prices because the real value of their repayments are reduced over time

Inflation distorts price mechanism. When average prices rise, the price mechanism cannot effectively fulfill its role as a resource allocating mechanism

It creates shoe leather and menu costs. Shoe leather costs can be incurred during times of inflation when households and firms make an additional effort to seek out the best deals. These costs are also called search costs, reflecting the increased time spent attempting to find the lowest available prices.

Case studyThe recorded highest rate of inflation in the world would be 12,950,000,000,000,000% Inflation the country affected by this inflation was Hungary

Facts about inflation Prices use to double every 15 hours

How did it happen ?The main cause of Hungary's inflation was wartime

spending meaning Hungary had spent most of its funds which were earned through taxes or government spending on the war and this had left their economy in shambles. in order to restore its economy they got themselves a loan also the shambles to caused its output to fall and in order to get out of this mess it started printing more money as the government were given the freedom to do so and then the great depression came to which caused the Hungary's agriculture market to fall. Note the government did not stop printing soon a dollar bill was worth a a hundred quintillion PENGO

How did they get out ?A new regime came into power which then

scrapped the previous currency which was called PENGO and in stored a new currency which was backed by gold, foreign currencies and foreign securities this was called FORINT they also stabilized their credit system workers were paid appalling wages due to increased taxes to pay back the debts and various other factors