The paper "Macroeconomic Issues: Inflation and Economic Growth" is a perfect example of a literature review on macro and microeconomics. The course clarified how persistent an increase in price level culminates into inflation. To measure inflation, the change in price from one period to the next is obtained. This can be done by examining changes in the price of a basket of goods from one period to the next. To succeed in doing this consumer price index is obtained and the percentage change is calculated. The outcome is inflation as stated by Back (2012).
In the classroom discussion, various determinants of the price level and inflation rate were identified. The 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 the money supply leads to a corresponding shift in the 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. The central banks, for example, regulate 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 the 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.
The 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 the 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 more goods and services.
Back, A. (2012, May 9). China’s Inflation Slowed in May. Retrieved 20 June 2012, from, http://online.wsj.com/article/SB10001424052702303665904577455252019721194.html.
Blanchard, O., & Galí, J. (2007). "Real Wage Rigidities and the New Keynesian Model". Journal of Money, Credit, and Banking 39 (1): 35–65.
Bradsher, K. (2012, June 10). Second Month of Slow Economic Growth in China. Retrieved 20 June, 2012, from http://query.nytimes.com/gst/fullpage.html?res=9501E2DB1030F933A25755C0A9649D 8B63&ref=china.