Inflation Rate

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Universitaca is a hypothetical country that is experiencing10% inflation

and 7% unemployment. Real GDP growth is at a mere 1% a year. The stock


market has crashed. What policies would you propose that the central bank
and the government pursue to lower inflation, lower unemployment, and
speed up GDP growth?
Answer
Inflation rate: -
Inflation is dearness of things that makes things costlier for all of us every year. Inflation occurs due
to many reason.

a) Economic boom (Gap between demand and supply) Demand pull inflation.
b) Raw material price increase (Cost push inflation)
c) Salary increased (Wage push inflation)
d) Currency depreciation (lose of value of currency)

If inflation is zero salary will not increase the money. Deflation will reduce spending and people will
not spend and productivity decrease and unemployment increase.

Best level of inflation for developed country to 2 % and developing country is 2 to 4 %. Price stability
and employment remains enhance.

Inflation rate can be control by interest rate by RBI & Printing notes and Govt can control by increase
and decrease of taxes.

There is direct connection between inflation and economic growth.

But some time we see that economic growth is going down and inflation rate is going up and
unemployment rate is increasing. This case is call stagflation. Reason of that country is facing
recession and due to cost push reason raw material price is increasing. This is the case which is in
DB2

This is worse situation in any economy the reason of that supply chain stock (short of health care
short). Fiscal policy (Not correct implementation) Monetary policy (Not corrective measure at correct
time).

Control of stagflation

Reduction in taxes: - Reduction in tax will increase people power to spend. You are more motivated
and spend more and economy will revive.

Restrictive monetary policy: - Increasing interest rates to control the excessive money supply in
economy. Higher interest rates increase the borrowing cost, discouraging the business owner and
individuals from taking loans. This will decrease the aggregate demand and result in a slowdown in
price increases.

Controlling trade union pressure: - Control of wages will enhance the cost push inflation.
Reducing excessive govt expenditure: - Control in government expenditure curb the money inflow
economy and people.

Business organizations should search for alternate sources of inputs of production and produce
substitute goods.
Government/RBI need to tighten the money supply and raise interest rates to decrease inflation.
Governments should take necessary actions to stabilize key institutions to retain public confidence in
their operations.
For reducing the cost of production. Government should reduce the taxes.

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