Inflation & Unemployment essays

Inflation & Unemployment essays Assess the Relative Costs of Unemployment Inflation is a persistent increase in the level of prices in an economy; the Retail Price Index (RPI) usually measures it, which is a measure of changes in the prices of consumer goods bought in the UK. Inflation can be caused by: too much demand in the economy. This is called demand-pull inflation, e.g. the UK in the 1980s. If demand increases and firms cannot produce enough output, they will increase their prices. higher costs forcing firms to increase their prices. This is called cost-push inflation, e.g. as happened in Western Europe in the 1970s when oil prices increased. excessive growth of the money supply. RPIX is sometimes known as the underlying or target rate of inflation. It is the RPI minus mortgage interest payments. The RPIY is the RPI minus not only mortgage interest payments but also local authority taxes and indirect taxes. The advantage of this measure is that it shows the underlying inflation rate undistorted by changes in interest rate and taxation. A low and steady rate of inflation provides a number of benefits for a country, in particular that of enabling businesses to forward plan with confidence. However a country with a rapidly rising inflation rate in excess of that its main trading partners will be likely to experience a number of problems, such as: redistribution of income some groups whose earnings are not linked to inflation will find their real earnings fall (e.g. employers with weak bargaining power, such as shop assistants). menu costs e.g. the costs of changing the prices in publicity material, displays, and slot machines. shoe leather costs with inflation, households and firms will have to search for good returns from their savings to protect their real earnings. This involves costs called shoe leather costs. planning difficultie...