Answer to Question #276593 in Economics for Nick

Question

The President, who was stepping down at the end of his term, was giving a speech on the state of the economy. He said: ‘I have presided over many years of low unemployment and very low inflation but I admit that in the last two years things have not been so stable. On a positive note, unemployment has been even lower than normal but the inflation rate has crept up to 7%. Next year inflation is forecast to be 12%, but that is for the next president to deal with.’ i) What causes inflation in an economy, and what could have caused inflation to increase so dramatically over the past two years? ii) What policy actions should the next president take to combat this rising inflation and how would these work? iii) What desirable macroeconomic goals may have to be sacrificed to deal with the current inflationary situation?

Answer 1

i) The inflation in an economy may be caused with the high GDP growth rates, so the inflationary gap occurred.

ii) The next president should implement contractionary fiscal or monetary policy to combat this rising inflation.

iii) Such desirable macroeconomic goals as low unemployment level and high GDP growth rate may have to be sacrificed to deal with the current inflationary situation.