(a) Explain whether there is a relationship between inflation and unemployment. Should government interfere and reduce inflation and unemployment? Provide real life examples.
(b) Using your home country as a case study outline and analyse inflation, unemployment and growth trends. Identify what range of the aggregate supply curve your country is operating in.
(c) Explain how monetary policy can influence an economy, including the exchange rate and employment levels.
Inflation is a situation when price raise of products and services, decreases purchasing power of people. When common price level actually rises, for each unit of the currency some goods as well as services could be purchased. As a result, purchasing capacity of the customers would slowly decrease. Within this situation original value of the currency will also loss, value of the goods plus services will even increase. Best procedure of the price inflation even is the inflation rate annual percentage alterations in price (Bell, 2005).
Trade-off amid the inflation as well as unemployment was initially reported by the researcher named A. W. Phillips within the year 1958 and even has been baptized by Phillips curve. General intuition behind such trade-off also is that with the fall in unemployment, workers get empowered towards pushing for greater wages. Organizations also try towards passing all these greater wage costs upon to the consumers, which also results in greater prices as well as in an inflationary grow up in economy. Trade-off even suggests that curve implies about the policymakers and that they can target less inflation rates otherwise low unemployment, yet not both. In 1960s, monetarists also emphasized upon the price stability which was low inflation, while the Keynesians additionally emphasized upon the creation of job (Blinder, 2007). Things that sustained this mix of lower inflation as well as lower unemployment were in reality productivity boom, high rates intended for incarceration of all those who may otherwise fall in ranks of unemployed, openness of economy of the nation. Few business sectors no doubt start clamoring for the greater monetary policies which also sacrifice creation of job as well as wage growth and development by slowing down of economic growth. But such fears of the inflation are possibly misplaced. A reasonable rate of the inflation is also conducive towards growth of the real investment, as well as in context of decades squeeze upon labor’s wage share, there also exist room towards expanding the employment with no setting off wage-price curved (Brash, 2011).
For several prior to 20th century value of pound had always remained almost same. Also there were many fluctuations that were forever balanced by appreciation. Later during World War I pound got reduced in value massively. Though during recession pound got appreciated again, later to 2nd World War this depreciation has also been very remarkable, leaving pound with the purchasing capacity of some less than 2% of value within the year1900.Such phenomenon also was named as inflation as well as since 1970s main objective of conservative government also has been towards reducing it. For explaining the way in which it would do this initially it is essential to explain different reasons of inflation. Official procedures of inflation are enhancement of general rate of costs measured in a phase of time. First form of inflation actually is so named as price-push inflation (Bräuninger and Pannenberg, 2002). This generally means that enhancing the costs of the factors of some productions like wages and rent interest as well as cost of the raw materials, enhanced normal profit need push up common level of the prices. All such things applies towards aggregate supply part of economy as well as arises partially as general wage prices arise, for instance powerful and harsh trade unions may also push up the wages without enhancement in productivity. Here prices of Import also play a vital role, because currently no nation is independent. When any nation has less inflation than the other it actually tends towards “importing” inflation with all its foreign trade just because the foreign goods and items get extra expensive. Even, the vast rise within the oil prices also has affected the western import of oil economies as well as has caused inflation. This altering rates of exchange even cause inflation for India. It also is estimated that some 4% devaluation within the currency would raise the inflation by some 1%. As production costs and prices of firm raise this has to enhance its price towards covering costs. Then in exchange, as goods are pricey, labour starts demanding wage enhancement that would increase production costs further (Dickens, 2013).
As economy cannot actually produce anymore, thus excess expense capacity is also eliminated through raising prices. In reality inflation is generally multi-causal as well as that is the reason why it also is difficult to find any real pattern within India. The main cause of this inflation within a year may not be same as within next year. Results of inflation also are very serious. It had bad effect upon the growth and especially as this has enhanced uncertainty as well as has discouraged savings (Ghosh, n.d.). Government of India also applied many ways towards controlling inflation. This could be done by source of the fiscal policy, which manages aggregate demand through using the government spending. Towards reducing the inflation government also must have reduced the expenditure as well as raised the taxes. Such policy, anyway, would have worked merely against demand oriented inflation as well as might face vast opposition from people because they are also made worse through reducing spending upon the health-care etc. Fiscal policy also is extra unpopular. The main problems along with the direct intervention actually are confrontation with the trade unions as well as employers, as prices are extra easily controlled within the public sector, this even tends to distinguish in support of the private sector. It even has distorted the market forces, as expanding sectors cannot find any of the novel workers, because of low price, while declining the sectors hold upon towards theirs. Such policy even has enforced not to attain account differentials, generally flat base strategy to be used like every worker could get a proper pay enhancement of some £4 per week, which also is unfair towards people earning some higher salaries because their pay percentage rise is also much smaller, in other hand this even makes distribution of the income extra fair (Gomulka, Ostaszewski and Davies, 1990).
The extra dangerous economical impede in Indian economy also is inflation that hinders financial power of people. Majority of people are yet suffering because of inflation within India. Government as well as economists must try to generate better strategies for development of the nation. Inflation also is additional to 5% from the 2004-2005 till 2007-2008, this would also tells people that the inflation is very constant rate somewhat around 5%, this GDP even fluctuates amid 14% till 16% in between 2004 to 2005 plus 2007-2008 (Hatti, 1977). There even is a development of economy in the inflation amid the year 2004-2005 plus 2007-2008. Such could be treated as the growth-Inflation in the nation. There also exits certain causes towards decrease in the GDP, where the inflation enhanced from the year 2007-2008 till 2009-2010. Towards understanding all this abnormality every commodity is classified in few sub-categories such as primary articles that comprises of all the food articles as well as Non-food Articles like fuel, power and light plus lubricants as well as manufacturing products. Through plotting values of every category that would come to understand which good and related price unusually varied from real trend. This also explains all about what are causes towards the decrease in the GDP as well as list of the products as well as its value which differs from real trend (Heston, 1968). Most crucial condition is the food-inflation is this. It also has been altering since last 5 years, that is from 2004-2005 and then 2009-2010 that shows merely increasing trend, even till 2009-2010 onwards this is demonstrating enhancing trend. Articles of non-food demonstrated developing trend till 2007-2008, thereafter it showed decreasing trend. Food Articles costs rise is also higher than the GDP. That can be one of causes why the inflation is greater in the food articles. Inflation in the food articles is somewhat around 8% – 9% since last 5 years. Last rate of the food inflation also is very high even when compared with the previous one. Such a scenario also explains regarding further research that is needed to understand and know clearly about what are the reasons of the food Inflation within India. The Food Article within Wholesale Price Index (WPI) also includes Egg, milk, meat and fish, vegetables, cereals, fruits, pulses and many other articles that determine contribution towards WPI (Heston, 1968). Chiefly food inflation about 2.2% upon the WPI could be demonstrated in the eggs, meat as well as fish is also found to donate more towards inflation. Some other powerful commodities also are vegetables, milk and even cereals. Pulses also come within the 5th position like a determinant of the food inflation; such has contributed about 0.6% of WPI. And this scene even explains that the food articles also are causes behind inflation within India. Inflation even is very high within the food articles and this fact impacts extra upon the middle class as well as below middle class populace.
Unemployment Rate within India has decreased to some 5.20 percent within the year 2012 from some 6.30 percent within the year 2011. This rate in the country averaged to some 7.58 Percent right from 1983 till 2012, attaining all time hikes of some 9.40% in the year 2009 as well as a record less of some 5.20% in the year 2012. Unemployment Rate within India is also reported by Ministry of the Labor as well as Employment, India. Here unemployment rate even measures number of populace actively searching for job likes a percentage of labor force. Here the details related to Unemployment Rate in India, all its actual values and even historical data as well as forecast, is being presented (Jha, n.d.). The statistic till date has shown growth of original GDP within the country named India through 2008 till 2013, with forecast up till 2018. GDP also refers to total values of the market of every good as well as service which are shaped within the country every year. It is very important pointer of economic potency of the nation. Original GDP is also adjusted for the price alterations and is thus regarded like a main indicator for the economic growth (Wyatt, 2005). Within the year 2012, India’s original GDO growth was approximately 4.7 percent as compared to last year. From the year 1983 till the year 2011, rates of unemployment in the country averaged 9% reaching some all time hike of about 9.4% in December of the year 2010. In the country, unemployment rate procedures number of populace actively searching for job like some percentage of labor force. In India, labor markets actually has suffered from great rates of the informal and agricultural employ where the jobs are scantily paid as well as are unprotected (Jha and Kulkarni, n.d.).
Labor surplus nation like India can never be treated as setting anywhere near the full employment. Here forever there exist some short-run supply blockages that if reassured allows expansion of the unemployment at a stable real wage, otherwise one which rises along with the productivity. Thus, a flat long-run supply curve might also be an applicable identification intended for this country till it attains full maturity as well as absorption of its entire labor surplus. Globalization as well as extra foreign inflows also have relaxed foreign swap constraint that used to exist as one of vital bottlenecks (Kapur, n.d.).
Aggregate supply of the nation helps it to measure volume of the goods as well as services shaped within economy at provided level of price.
AS it represents capability of the economy towards delivering goods plus services towards meeting the demand
The basic nature of the relationship would also differ amid long run as well as short run
1. Short run aggregate supply also called SRAS would show the total planned result while the prices in Indian economy could change yet prices as well as productivity of every factor like wage rates as well as state of the technology are even held constant (Katz and Krueger, 1999).
2. Long run aggregate supply also called LRAS would show the total planned result while both prices as well as average rates of wage could change this is a proper measure of India’s potential output as well as concept is attached to production likelihood frontier
In long run, LRAS curve will be assumed as being vertical where it will not alter when common price level alterations.
In short run, SRAS curve will be assumed as upward sloping which will be responsive towards a change within the aggregate demand that is reflected in the change in common price level (Kishor, n.d.)
The vital cause of the shift within supply curve is the change in the business costs – for instance:
1. Changes within the unit labor costs: these are the wages costs which are adjusted for level of the productivity. An increase in the unit labor costs has been brought by the firms paying greater wages (Kothari, 1988).
2. Commodity prices: alterations to the costs of the raw material and some other components like prices of the oil, copper and rubber and iron ore as well as aluminum plus some other inputs that also affect the nation’s costs (Vitale, 2003).
Identifications of the vertical and then a proper horizontal curve of supply are consecutively imposed upon the Indian time sequence inflation as well as industrial output development data within a dual-equation Structural model of Vector Auto regression. The outcome provides not direct test of identifications. A great elasticity of the supply within the long run cannot also be ruled, as supply shocks also have a very large impact upon inflation as well as demand has very large plus persistent effect upon result levels (Mahajan, Saha and Singh, n.d.). Yet supply is focused towards recurrent shocks.
Money supply of India has affected the economy of the nation on triple sides. One, the money supply gets used to manage inflation within the economy. On demand side, at whatever time money supply within the economy enhances, consumer-expenditure increases right away in economy as of increased fund in system. But this supply has never varied within short – run, thus there exist a temporary disparity of the demand & supply within Indian economy that exerts upward pressure upon the inflation (Sen, n.d.). Such an argument assumes about the supply and demand drives that are commonly in this case. On supply side, because of an increase within the demand the supply can merely be enhanced through the capacity accompaniments (Mann, 1969). This results in cost of the production towards rising & which is reflected within the inflation in India. Secondly, money supply even has shown direct relation with growth of Indian economy. Until the economy reaches total – employment phase, economy development is difference amid the money supply enlargement rate & inflation, some things that are equal. When the Indian economy would reach the full employment phase, growth within money supply will be set off through a growth within the inflation, some things being equivalent. This will happens as output cannot rise after total employment plus enhances sole with money supply. Also, money supply has a vital relation with the interest rates. Single variable could be utilized to control other. In India both cannot be managed simultaneously. If RBI likes to peg interest rate on a convinced level, it also has to provide whatever fund is demanded on level of the interest rate (Odedokun, 1999).
In India, objectives of the monetary policy developed as upholding price stability as well as ensuring proper flow of the credit towards productive sectors of economy. Along with progressive liberalization as well as increasing globalization of economy, carrying orderly situations in financial markets also has emerged like additional policy aims. Therefore, monetary policy within India endeavors towards maintaining a sensible balance amid the price stability and economic growth as well as financial stability. Monetary policy scaffold in India through mid-1980s and till 1997-98 could be characterized like a monetary objective framework upon lines suggested by monetary policy committee in the year 1985 (Oehler, 1979). Because of practical stability of fund demand operation, yearly growth within the broad money also was utilized as very intermediate intention of the monetary policy towards achieving final aims and objectives. The monetary management comprises of working out on the growth constant with the projected GDP development and very tolerable phase of inflation. In live out, however, monetary aims and approaches are used within very flexible way with the ‘feedback’ through developments in real sector. In 1990s, increasing market direction of financial system as well as greater inflows of the capital imparted unsteadiness to money command function (Patnaik, 1975).
Conclusion:
With changing scaffold of the monetary policy within the Indian economy from proper monetary targeting towards an amplified multiple indictors loom, operating targets as well as processes also have undergone an alteration. There also has been proper shift from the quantitative targets of the intermediate towards interest rates, like development of the financial markets has enabled broadcasted of the policy signals via interest rate and several channel. At same time, accessibility of several instruments like CRR, OMO counting LAF as well as MSS has supplied necessary suppleness to financial operations. While the formation of the monetary policy is very technical procedure, it also has become extra consultative as well as participative with involvement of the market participant, scholastic as well as experts. Internal process also has been re-engineered along with extra technical analysis as well as market orientation (RANGANATHAN, 1964). For enhancing the transparency in the communication focus has even been upon dissemination of the information as well as analysis to public via Governor’s monetary strategy statements as well as also via regular distribution of the policy research plus the macroeconomic as well as financial information.
In a nutshell here are all the details related to the monetary policy and inflation rate as well as relation amid inflation and unemployment that affects the nation India on a whole and thereby influences all its economy to enable the nation work better and perform in an enhanced way.
References
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Blinder, A. (2007). Monetary policy by committee: Why and how?. European Journal of Political Economy, 23(1), pp.106-123.
Brash, D. (2011). Monetary and Fiscal Policy: How an Agreed Inflation Target Affects Fiscal Policy. Economic Papers: A journal of applied economics and policy, 30(1), pp.15-17.
Bräuninger, M. and Pannenberg, M. (2002). Unemployment and productivity growth: an empirical analysis within an augmented Solow model. Economic Modelling, 19(1), pp.105-120.
Dickens, E. (2013). The Political Economy of U.S. Monetary Policy. International Journal of Political Economy, 42(3), pp.24-43.
Ghosh, R. (n.d.). Indian Economy Watch. SSRN Journal.
Gomulka, S., Ostaszewski, A. and Davies, R. (1990). The Innovation Rate and Kalecki’s Theory of Trend, Unemployment and the Business Cycle. Economica, 57(228), p.525.
Hatti, N. (1977). Impact of assistance under P.L. 480 on Indian economy 1956–1970. Economy and History, 10(1), pp.23-40.
Heston, A. (1968). Variations in Agricultural Growth and Output between and within Regions of India. Asian Survey, 8(3), pp.174-187.
Heston, A. (1968). Variations in Agricultural Growth and Output between and within Regions of India. Asian Survey, 8(3), pp.174-187.
Jha, R. and Kulkarni, V. (n.d.). Inflation Volatility and the Inflation-Growth Tradeoff in India. SSRN Journal.
Jha, R. (n.d.). Inflation Targeting in India: Issues and Prospects. SSRN Journal.
Kapur, M. (n.d.). Inflation Forecasting: Issues and Challenges in India. SSRN Journal.
Katz, L. and Krueger, A. (1999). New Trend in Unemployment? The High-Pressure U.S. Labor Market of the 1990s. The Brookings Review, 17(4), p.4.
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