The course clarified how persistent increase in price level culminates into inflation. To measure inflation, change in price from one period to the next is obtained. This can be done by examining changes in price of a basket of goods from one period to the next. To succeed in doing this consumer price index is obtained and percentage change is calculated. The outcome is the inflation as stated by Back (2012). In the classroom discussion, various determinants of price level and inflation rate were identified. Long run price level is determined by money in circulation.
This is factored in quantity theory which equates supply and velocity of money to price level and output in the economy, which is otherwise stated as M*V=P*Y. Definitely, a change in money supply leads to a corresponding shift in price level. The People’s Bank of China, through its monetary policy reduced the lending and deposit rates with an intention to stimulate money supply in the economy. This step improves demand. Central bank for example, regulates deposits accepted by commercial banks. The central authority often calls upon commercial banks to store some of their customer deposits with the central reserve.
At the same time, financial institutions hold some funds for purposes of taking care of unexpected needs. All these initiatives affect money supply and demand. Depending on rate of inflation, a central bank may use open market operations to regulate money in circulation. In the short-run, inflation and price are determined by aggregate demand and supply. Central bank can employ monetary policy to change aggregate demand and supply. This is a reason why authorities in china supported the declining inflation by reducing interest rates, which had the eventual effect of building aggregate demand and supply.
When interest rate is reduced, people are motivated to borrow money. More money is therefore in circulation. If this is not checked, inflation will creep in given that more money will be chasing the same good. The People’s Bank of China further considered slashing taxes so that disposable income is increased. An increase in disposable income means that people will demand for more goods and services. After the global downturn of the economy, inflation rate was very high while unemployment remained low as indicated in the Philips Curve of Wage inflation against Unemployment attached as appendix A.
The graph in appendix A aids in understanding the effect of easing inflation on employment. As the economy grows, there is no doubt that aggregate demand will increase consequently increasing employment. In the beginning, people will press for more wages but as the economy grows, more labour force is employed and wage start rising slowly. This theoretical observation is comparable to China whose inflation is decreasing whilst employment face upward trend. “Second Month of Slow Economic Growth in China”Bradsher (2012) carried out an analysis of the deteriorating economic growth in China.
According to the writer, the Chinese economy was previously viewed as a strong economy capable of emancipating global economy from recession. This is not the case as Bradsher alludes that China registered feeble growth in the month of May. The nation’s performance was even worse compared with other economies. Although sectors i. e. industrial production, retail sales, and investment in fixed assets were underperforming, they were expected to change once Chinese government took steps to stimulate the economy.