Answer to Question #171767 in Macroeconomics for karthick

Question

Explain with any two examples how to rectify economic variables for the effects of inflation. How does it get expressed in the job market? Why is it needed?

Answer 1

Solution:

Inflation refers to a sustained increase in the general price level in the economy over a period of time.

The negative effects of inflation include a reduction in the consumer's purchasing power, raises the cost of borrowing through higher interest rates, reduces employment and growth, weakens a currency, and lowers savings.

Inflation can be controlled using the below two methods:

·        Contractionary monetary policy – The goal of a contractionary policy is to reduce the money supply within an economy by decreasing bond prices and increasing interest rates. This helps in spending reduction since there is less money circulating around; those who have money want to keep it and save it instead of spending it. It also means, there is less available credit which can reduce spending. Reducing spending during inflation is vital since it helps halt economic growth, including the rate of inflation.

·        Reserve requirements increase – This is a technique to increase reserve requirements on the amount of money banks are legally required to keep on hand to cover withdrawals. The more money banks are required to hold back, the less they have to lend to consumers. If they have less to lend, consumers will borrow less, which will decrease spending.

 

Inflation is expressed in monetary terms in the job market. It results in an increase in the volume of employment due to the increased production being experienced as a result of an increase in the aggregate money income.

 

Inflation is needed when the economy is not running at full capacity, which means that there is unused labor or resources. Inflation tends to help increase production. This is due to an increase in aggregate income, which stimulates more spending due to increased aggregate demand. More demand results in more production to meet the surging demand.