SAJC 2024 Price Stability Lecture Notes Students Uploaded

ST ANDREW’S JUNIOR COLLEGE JC2 H2 ECONOMICS 2024 PRICE STABILITY In this set of notes, we will examine the next macroeconomic goal – Price Stability. We examine the different types of unemployment, their causes, and consequences to different economic agents. We look at how unemployment may affect standard of living and the macroeconomic policies to deal with unemployment to improve the standard of living of a country. Important concepts and tools and analysis  Demand-pull inflation  Cost-push inflation  Deflation  Consumer Price Index (CPI) Key questions to consider 1. How does a country measure the level of inflation in their economy? 2. What are the different types of inflation? Do they share the same causes? 3. How does inflation affect the different economic agents (consumers, producers, government) in an economy? 4. Can all types of inflation be solved with the same policy? Are there particular circumstances that will make certain policies more effective in reducing inflation? 5. Why is deflation an issue for economies? Shouldn’t falling prices be a good thing? 6. How can a government pull an economy out of deflation? 7. Is inflation or deflation better?

St. Andrew’s Junior College Economics Department 2024 2 Contents 1. Inflation Basics ................................................................................................................................................................... 4 1.1. Definition of Inflation ............................................................................................................................................... 4 1.2. Inflation and the Value of Money ........................................................................................................................ 4 1.3. Degrees of Inflation ................................................................................................................................................ 5 2. Types and Causes of Inflation ........................................................................................................................................ 6 2.1. Demand-pull Inflation.............................................................................................................................................. 6 2.1.1. Causes of Demand-pull Inflation ...................................................................................................................... 6 2.2. Cost-push Inflation ................................................................................................................................................... 8 2.2.1. Causes of Cost-push Inflation ............................................................................................................................ 8 2.3. Interaction between Demand-pull and Cost-push Inflation: ............................................................................ 9 3. Consequences of Inflation .............................................................................................................................................. 11 3.1. Consumers ................................................................................................................................................................ 11 3.1.1. Changes in Purchasing Power ......................................................................................................................... 11 3.1.2. Erosion of Value of Savings ............................................................................................................................ 12 3.2. Producers ................................................................................................................................................................. 12 3.2.1. Fall in level of investments ............................................................................................................................... 12 3.2.2. Reduce efficiency in production ..................................................................................................................... 13 3.2.3. Fall in level of production ................................................................................................................................ 13 3.3. Governments/Economy ......................................................................................................................................... 13 3.3.1. Impact on other macroeconomic objectives .................................................................................................. 13 4. Macroeconomic Policies to Achieve Price Stability................................................................................................... 16 4.1. Demand-side Policies ............................................................................................................................................ 16 4.1.1. Fiscal Policy ........................................................................................................................................................ 17 4.1.2. Monetary Policy centred on interest rate ..................................................................................................... 19 4.1.3. Monetary Policy centred on exchange rate ................................................................................................ 21 4.2. Supply-side Policies ............................................................................................................................................... 26 5. Deflation ........................................................................................................................................................................... 30 5.1. Definition of Deflation........................................................................................................................................... 30 5.2. Causes of Deflation ............................................................................................................................................... 30 5.2.1. A decrease in AD .............................................................................................................................................. 30 5.2.2. An increase in SRAS .......................................................................................................................................... 30 5.2.3. An increase in LRAS .......................................................................................................................................... 30 5.3. CONSEQUENCES OF DEFLATION ...................................................................................................................... 31 5.3.1. Consumers ........................................................................................................................................................... 31

St. Andrew’s Junior College Economics Department 2024 3 5.4. Producers ................................................................................................................................................................. 32 5.5. Governments ........................................................................................................................................................... 32 6. MACROECONOMIC POLICIES TO ACHIEVE PRICE STABILITY (DEFLATION) ..................................................... 34 6.1. Fiscal Policy ............................................................................................................................................................. 34 6