Archive for Section 3

China’s Inflation eases due to the tightening measures

This BBC News article of May 24, 2011 reports that annual inflation rate in China has started to decrease in the month of April from a year earlier due to the government efforts mainly from monetary tightening measures.

Inflation is a rise in general prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also affects the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. High inflation in China has been mainly caused by the rapidly growing economy in the past few years due to the excessive money supply in the market encouraging investment and spending. Rising food, fuel, housing prices have been identified as serious problems.

Today, most mainstream economists favor a low, steady rate of inflation. Keeping low (below 2-3%) inflation is vital because it may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn and reduce the risk of a liquidity trap in order to stabilize the economy.

Government can control inflation by using monetary or fiscal policy but the Chinese government has focused mainly on tightening monetary policy. Generally, central banks in most countries are the monetary authorities that control the size of the money supply through the setting of interest rates through open market operations and through the setting of banking reserve requirements. China’s Central Bank has continuously raising interest rates and at the same time allowing Yuan currency to strengthen further against the US dollar. Raising interest rates causes higher borrowing costs which will discourage excessive investment. Also, government controls banks to hold more money through higher reserve requirement policy instead of lending it out. Results show that industrial output in China started to slow down from the month of April from a year ago, mush less than economists’ forecasts. Allowing Yuan currency to strengthen against US dollar brings down the cost of imported items such as fuel and food. Even though pressures in the rising price of food and fuel still remain, government believes that the inflation will gradually fall in a short term to mid term.

Most economists in this article view Chinese government monetary policy as positive. Even though inflation is still too high as of today, there are some signs that policy measures put in place over the last six months are showing impact from the data announced by the government. Chinese government needs to further monitor the situation closely on inflation to avoid possible economic recession and at the same time avoid possible deflation. If successful, the overall economy could then be stabilized in a long term.


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Car Corporation

How can demand and supply side policy help Jorgenson

William Jorgenson sent us a letter concerning about the rising cost of production associated with the increase in oil price, which effects his automobiles company. As a result, the company’s profit has fallen and fewer cars are being sold.

To improve this situation, there are two policies that can help Jorgenson. The first policy is the supply side policy. The policy is designed to improve the supply side potential of the economy, make markets and industries operate more efficiency. It is the key to achieving sustained economic growth without a rise in inflation, which, in this case, supports Jorgenson to…

The second policy is the demand side policy. Low tax should also encourage entrepreneurs as they will not lose much of the profit in taxation. Using tax in this way to encourage enterprise and hard work is a supply-side policy. To improve this policy, we have to convince Jorgenson to increase employment. Also, we should reduce the cost of transportation and give high incentive to the employers to increase their working confident and boost them to work harder.

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Silver Cougars of America

Silver Cougars of America sent us a letter concerning about the increase in inflation rate.

There are two ways to control the inflation. The first way is to increase the interest rate. People will save their money and they will not spend. This will shift the demand curve to some degree. The second way to control the inflation is by cutting down the money supply. This will lower the inflation rate and it will boost up the currency.

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Campaign for Job Security

How can fiscal policy be used to help workers like Joe?

Fiscal policy is the use of government spending and taxation. There are two types of economists, which are the Keynesians and Classical economics. In this case, the two economists disagree on the effective of fiscal policy on unemployment.

Firstly, the Keynesians says yes, fiscal policy can be effective in reducing unemployment. In a recession, expansionary fiscal policy will increase AD, causing higher output, leading to the creation of more jobs.

The Classical economics, on the other hand, says no. Fiscal policy will only cause a temporary increase in real output. In the long run, expansionary fiscal policy just causes inflation and does not increase real GDP. Classical economists argue that to reduce unemployment it is necessary to use supply side policies which increase the flexibility of labour markets.

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Leading, Lagging and Coincident indicators

We have just started on an assignment showing the United States current economy and decide on possible solutions to the situation. In order to figure out this solutions, we need to look at 3 economic indicators, which are leading indicator, lagging indicator and coincidence indicator. These indicators can be used to predict future economic trends and future financial. Firstly, the leading indicator is showing the changes in the economy before the economic activity occurs. This helps the economist to see the “future” of the economy by using data they currently have. On the other hand, Lagging indicator shows the changes that happen after the economic activity. These 2 indicators are important for the economist because it shows some improvement in the economic activity. Coincident indicators occur at approximately the same time as the conditions they signify.

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Panasonic to slash 17,000 jobs over the next 2 years

Panasonic Article from LA Times

According to LA Times, Japan’s largest home appliances will cut 17000 workers due to the restructuring costs as well as mounting losses and damage resulting from the earthquake and tsunami disasters.

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Formative Test Reflection

Question: Use AD/AS diagrams to explain the causes of inflation

I did the diagrams correctly but I was disappointed with my answer because from what I’ve seen in the answers list, I did not include all the answers needed to ace this test. I included about half of the answers needed.

To improve this test, I need to study more on the vocabulary and explain in detail.

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