Macroeconomic Commentary
Commentary
Two of the main macroeconomic objectives are low inflation rates and high economic growth. In an economy inflation is the persistent increase in price levels over a period of time while economic growth is an increase in real GDP (value of economic output adjusted for inflation). Most times, government stifles economic growth as they disregard it to concentrate solemnly on finding a solution for high inflation. This is presently one of India’s greatest problems as it struggles to combat the “8-month high” rate of 7% that has engulfed the country. Pursuing a contractionary monetary policy, thus managing the economy through an increase in interest rates may although help in reducing inflation will also simultaneously slow down the economic growth. India’s central bank is therefore in the midst of an endeavor to balance out the two primary policy goals.
As stated in the article “vegetable and onion prices” are what “pushed” India’s inflation rate up and can thus be considered an example of cost-push inflation. Onions, which may not seem important to us, are essential to the Indian culture and cuisine. Cost-push inflation, as the name suggests, is caused by an increase in the cost of production. Therefore as their prices soar the cost of production will also rise resulting in a shift in the short-run aggregate supply curve inwards (SRAS1→ SRAS2). Aggregate supply being the total supply of goods and services produced within an economy at all price levels over a certain time period. The result is a fall in the real level of output (Q1 → Q2) and an increase in the overall price levels (P1 → P2).
In the short run, this unexpected high inflation rate will allow producers to benefit and the labor force to suffer. As general prices increase but cost of production remains relatively stable it permits them to increase their profits, this only happens in the short run because as time passes they will have to adjust wages to reflect the overall
Two of the main macroeconomic objectives are low inflation rates and high economic growth. In an economy inflation is the persistent increase in price levels over a period of time while economic growth is an increase in real GDP (value of economic output adjusted for inflation). Most times, government stifles economic growth as they disregard it to concentrate solemnly on finding a solution for high inflation. This is presently one of India’s greatest problems as it struggles to combat the “8-month high” rate of 7% that has engulfed the country. Pursuing a contractionary monetary policy, thus managing the economy through an increase in interest rates may although help in reducing inflation will also simultaneously slow down the economic growth. India’s central bank is therefore in the midst of an endeavor to balance out the two primary policy goals.
As stated in the article “vegetable and onion prices” are what “pushed” India’s inflation rate up and can thus be considered an example of cost-push inflation. Onions, which may not seem important to us, are essential to the Indian culture and cuisine. Cost-push inflation, as the name suggests, is caused by an increase in the cost of production. Therefore as their prices soar the cost of production will also rise resulting in a shift in the short-run aggregate supply curve inwards (SRAS1→ SRAS2). Aggregate supply being the total supply of goods and services produced within an economy at all price levels over a certain time period. The result is a fall in the real level of output (Q1 → Q2) and an increase in the overall price levels (P1 → P2).
In the short run, this unexpected high inflation rate will allow producers to benefit and the labor force to suffer. As general prices increase but cost of production remains relatively stable it permits them to increase their profits, this only happens in the short run because as time passes they will have to adjust wages to reflect the overall