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Macroeconomics I Project
In a progressive economy producing both goods and services, some inflation is inevitable. ... As these wages will increase at the same rate as the productivity the overall price level in the goods sector will remain stable and there will be no inflation. ... As these wages are increasing while productivity is remaining constant, the overall price level in the service industry will increase, therefore inflation results. ... 4 respectively, the inflation in the average price level in the economy is calculated as 0. ... The rate of inflation in the average price level will therefore be 1. ... The high rate of inflation in Argentina in the 1980’s can be explained using this theory. ... This is because the growth in money (m) would have been increasing at a much faster rate than that of GDP (y), therefore the difference between the two would have been getting greater and greater over time therefore increasing the price level and resulting in high inflation.
Argentina cured the 1980’s inflation problem firstly by stopping the excessive printing of money that had been occurring. ... “This immediately solved the hyper-inflation and so appealed to foreign investors…” (Weekend Australian, Jan 2002). This meant that the Argentinean government could no longer create high inflation through careless policies, as the nation would have to have the same price level and rate of inflation as the US.
A moderate and stable rate of inflation has a positive effect on investment demand through its effect on nominal interest rates. This is because inflation raises nominal interest rates and creates debt problems for borrowers. This discourages investors as any money borrowed by firms is unstable and could cost a lot more to repay if inflation increases. If the rate of inflation is stable, investors will be confident to invest as the inflation rate will not be expected to rise and therefore the investors can be relatively sure their investment is a safe and worthwhile one.
Approximate Word count = 1551
Approximate Pages = 6.2
(250 words per page double spaced)
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