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Rising Inflation Research Paper

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Rising inflation
In the article “U.S. Core Inflation Accelerates”, written by Katia Dmitrieva, discusses the topics of rising inflation and economic growth. In order to have economic growth, the economy must have a low, stable rate of inflation and low unemployment. Inflation is the sustained increase in the general price level. Inflation is considered at a decent level when at 2-3%. The core rate of inflation is calculated by using the consumer price index without the inclusion of goods with volatile prices.The consumer price index measures the cost of living for an average household by comparing the cost of a basket of goods from year to year. This method, however, does not measure different rates of inflation for different income earners, …show more content…

The Yinfl line on the graph represents the point that is greater than potential output. The increase in aggregate demand is caused by an increase in demand by consumers, firms, government, and foreign countries - leading to inflation. Inflation has consequences such as redistribution effects, uncertainty about the future economy by consumers and firms, menu cost, and may lead to export competitiveness, as well as, lead to inappropriate spending decisions known as money illusion. The last and most costly consequence of inflation is the significant impact that will occur with hyperinflation. Hyperinflation is caused by significant increase of inflation rates. This can cause major political and social …show more content…

Contractionary monetary policy involves the manipulation of aggregate demand through the increasing of interest rate, which aims to decrease investment and consumption.With this policy the central bank would decrease money supply and more people would demand money. When there are lots of people demanding money but a limited supply of money the cost of borrowing that money increases. When the cost of money increases the demand for money decreases.Therefore, investment and consumption would decrease. This would also cause a leftward shift of aggregate demand. The most efficient way to decrease inflation is through contractionary monetary policy. When utilizing monetary policy there are no political constraints; there is easy implementation; and political objectives are not necessary. The monetary policy allows for the adjustment of interest rates in order to fine tune the economy. The downfall of contractionary monetary policy are the time lags and the conflict with government objectives. However, by using contractionary monetary policy, the central bank can act without political pressures.

The above graph shows how when interest rates are high (Pl1), the demand for money drops from AD1 to AD2. The decrease in Aggregate demand reestablishes the economy at equilibrium where the economy is at its full potential

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