Inflation is defined as “a persistent increase in the average price level in the economy” (Blink 201).  According to this article, surging oil prices and food bills have caused an increase in consumer price inflation. In response to this issue, the Bank of England (BOE) and some policymakers came up with two different decisions. The BOE’s Monetary Policy Committee (MPC) wanted to maintain a low key interest rate, the price of borrowed money (172), while policymakers wanted to maintain the program of Quantitative Easing, under which the BOE injected money into the economy. The issues of inflation and interest rates are addressed in the macroeconomics section of the IB economics syllabus.

Since the inflation is caused by an increase in oil and food prices, it can be illustrated by a cost-push inflation diagram. A shift in short run aggregate supply to the left results in a decrease in real output and an increase in price levels.

There are several stakeholders in this case. To solve this rise in price levels caused by costs of production, the MPC decided not to raise interest rates. An increase in interest rates may cause a decrease in aggregate demand, which will lower the price levels. However, it will also cause the real output to decrease and cause unemployment. Some policymakers on the other hand, wanted to maintain Quantitative Easing. It would increase money supply and could cause a shift in SRAS to the right. However, excess money supply in the economy is another cause of inflation. Therefore the bank would need to be cautious with money supply. As for households, the MPC’s decision may be beneficial to them because interest rates will remain low, but real output will also decrease. Quantitative Easing benefits households since there will be an increase in SRAS, but at the same time the problem of inflation can get worsened if the amount of money is not carefully calculated.

Many nations around the world are attempting to recover from the financial crisis, one being Spain. According to the article from the Guardian, it states that the rise in Eurozone’s interest rates, which is the price for borrowed money, would hurt Spain’s economy, especially the small businesses and the people that are trying to repay their loans. (Blink 172) Because the European Central Bank (ECB) is raising the interest rates, Spain is not able to move forward while expanding its economic growth, increase in a national income during a time period. (Blink 321)

Through this simple news, the concept of monetary policy, an official policy governing the supply of money in the economy and the level of interest rates in an economy, can be applied. (Blink 176) In this particular situation, the tight monetary policy can be applied since the article states that there has been a rise in eurozone’s interest rates. Due to the rise in interest rates, consumption in Spain would probably decreased, which also means that the cost of loans are high, and there are less money floating in the economy.

From this diagram, one can see that the aggregate demand (AD), total spending on goods and services in a period of time at a given price level, has been decreased. (Blink 169) Which then lowers the price level, as well as the real GDP. From the decrease in AD, a new equilibrium is set, which is to the left of the long-run aggregate supply (LRAS), total supply of goods and services produced by a national economy during a given time period. (Blink 181)

Although on the diagram, the real GDP may seem as though it is decreasing; that is only speaking in short term. While in the long term, the GDP would theoretically stay the same. Due to the fundamental principal that theoretically speaking equilibrium would return to its original location, which is on the LRAS. But in the real world, sometimes it is not true. The real GDP may in fact decrease for an unknown time period, which would mean that Spain would need to find ways to “make the cut for public spending while at the same time expand its economy.”

The different stakeholders at hand include homeowners or citizens of Spain and the Spanish government. The homeowners and citizens of Spain are attempting to repay their loads, but are find it difficult due to the current situation at hand. These people are unable to repay because of the rise in the cost of loans. On the other hand, the government is attempting to cope with ECB’s raise in interest rates while allowing its own economy to grow.

Despite the foreign chambers of commerce’s optimistic assessment regarding the Philippines’ economic growth, about half of the country’s workforce seems to be jobless, which is dramatically contributing to the increase in poverty. This article refers to topics in macroeconomics by addressing unemployment rates and economic growth.

As it is defined as “people of working age who are without work, available for work and actively seeking employment” (Blink, 216), unemployment rate rose from 6.9% to 7.1% in a year. The NSO (National Statistics Office) also remarks that the number of underemployed people also rose from 19.4% to 19.6%, also in a year. However, the article also states that one in three Filipino citizens find themselves under skilled for the jobs they are applying for meaning that they will have to become overseas Filipino workers.

When examining this situation on a diagram, the SRAS (short run aggregate supply) curve would be shifted to the left, from SRAS₁ to SRAS₂ because there is a significant decrease in labor.

The stakeholders involved in this situation such as the country’s workforce are being negatively impacted because they are facing a structural unemployment and is described as the number of jobs that are available in the labor market is insufficient to provide a job for everyone who wants one. In the long run however, the foreign chambers of commerce is hoping to re establish a higher level of employment as the GDP is growing, shifting the LRAS (long run aggregate supply) rightward in order for the SRAS to shift rightward and back on the LRAS.

Other stakeholders like producers also seem to be negatively impacted because their work force gets diminished as people are not qualified enough for their job offers. By waiting for the country’s GDP to grow and shift rightward, as well as to wait for the government to educate or train more efficiently their population, they will slowly begin to get back on track.

South Korea attempted to slow inflation by raising interest rates to 3% in March. The basic economic problem in this article is inflation, average rise of price levels of all goods and services, and demand-side monetary policy, a policy that changes ‘the money supply and the rate of interest affect aggregate demand’ (Glanville). As stated in this article, the increase in food and energy costs has caused price levels to rise. In order to counter inflation, the government has increased interest rates to control money supply in the economy. This policy would probably work because an increase in interest rates means a higher cost in borrowing money from banks. Under this condition, fewer investors and consumers would be willing to invest and consume. Aggregate demand, the total demand of all goods and services in an economy, is directly determined by investments and consumption. So a decrease in investments due to higher interest rates would lower aggregate demand. Due to the decrease in aggregate demand, real GDP, total income of an economy, and price levels lowers too.

In the short run, investments and consumption may decrease due to the rise in cost to borrow money. Under the high cost to borrow money, consumers and investors are unlikely to consume and invest as much as there is a lower interest rate. This whole reaction of the consumers and investors can be represented by a graph of the relationship between money supply and interest rates. As interest rate increases, money supply decreases, and the major reason behind this is a drop in aggregate demand, more specifically consumption and investments.
In the long run, as a result to the decrease in investments and consumption, firms and producers may experience a lower in revenue due to the decrease in aggregate demand. Hence, GDP and price levels may decrease. Although price levels may lower in favor of the government, unemployment rate may rise according to the Phillips curve. Inflation rate and unemployment rate have an inverse relationship as an economy may have a higher inflation rate when more resources are occupied, and a decrease in inflation rate would lead to a higher unemployment rate. So due to the lower revenue they get, firms and producers may be less willing to pay for all workers and cause unemployment.

The article I chose Al Jazeera: Chinese Inflation at 28-Month high focuses on China’s recent problem with inflation. Inflation is defined as “a persistent increase in the average price level in the economy, usually measured through the calculation of a consumer price index.” (Blink 201) China’s government said that the inflation has exceeded five percent for the time in more than two years; the consumer price index has risen from 4.4% to 5.1% in food prices. Inflation has both good and bad effects on the economy. With high inflation rates, there is a lower unemployment rate which is a benefit for the economy, but the cons are more prevalent in China’s current situation where the costs of inflation resulting in loss of purchase power where consumers are paid the same wages but goods and services are more expensive making it more difficult for consumers because with less purchasing power it will reduce the desired living standards. The current inflation in China is 5.1% meaning all goods and services in the economy has risen by 5.1% making food costs higher. The inflation will also discourage consumers to invest or spend money because of the effects on savings and interest rates where you are better off spending your money than saving it in inflation situations, which results in a shift in AD to the left because of consumers demanding less of whatever is supplied due to higher average price level. While Inflation is not a very serious issue in developing and growing nation such as China, but it could spiral out of control if not kept in check. Government officials have speculated that an interest rate rise or tighter lending restrictions were imminent after pledging to shift its monetary policy stance in 2011 from “relatively loose” to “prudent”.

http://english.aljazeera.net/business/2010/2010/12/20101211151421508880.html

Article: Vietnam inflation rate hits 13.9%

According to this article, the inflation rate in Vietnam has risen to the highest level in two years, with a CPI increase of 13.9%. Inflation is “a persistent increase in the average price level in the economy, usually measured through the calculation of a consumer price index (CPI)” (Blink 201). According to the article, the increase in consumer prices has been largely due to higher food and fuel prices. It can thus be inferred that the cause of inflation was an increase in production costs, which are affected by food and fuel prices. In other words, there is a decrease in SRAS, short-run aggregate supply.

Aggregate supply is defined as “the total amount of goods and services that all industries in the economy will produce at every given price level” (179). The short-run aggregate supply is an upward sloping line because there is a “positive relationship between the price level and the amount of output that a country’s industries will supply” (179). As SRAS decreases, or shifts to the left, real GDP decreases while price levels increase. The increase in price levels demonstrates the inflation caused by higher food and fuel prices.

In the short run, consumers and producers are both affected. With the rising price levels in the economy, consumers will be more inclined to save their money instead of spending it. Because of this, firms would look to reduce production due to reduced demand. One way of doing this could be to lay off workers, thus causing unemployment to rise. Therefore, the situation at this point is stagflation because of the combination of inflation and unemployment.

In an effort to combat this inflation, Vietnam has raised key interest rates. This is known as contractionary or “tight” monetary policy, where monetary policy is defined as “The set of official policies governing the supply of money in the economy and the level of interest rates in an economy” (176). The goal of tight monetary policy is to reduce aggregate demand (AD), which is defined as “the total spending on goods and services in a period of time at a given price level” (169). This is represented as a downward sloping line on the macro diagram. As interest rates increase, AD will decrease, or shift to the left, causing real GDP to decrease as well as price levels to decrease. Thus, the leftward shift in AD will result in a reduction of inflation.

In the long run, as interest rates rise, consumers would be more inclined to save because of higher returns. As this would decrease demand for goods and services, producers would be forced to reduce their prices to match the market equilibrium. However, producers would then also need to reduce their costs, causing unemployment to increase further. While interest rates help alleviate inflation, unemployment would become an increasing concern in the economy.

This article deals with the problem that workers face with the ongoing inflation. Inflation is defined as “a persistent increase in the average price level in the economy,” and the reason for this inflation is the higher energy and food prices (Blink 201). The main reason for the workers’ problems is that their wages are not keeping up with the inflation, which is increasing at just above 2%; wages, on the other hand, have only gone up by 1.7%.

The situation in the article can be described using a Macro diagram. Due to the increasing energy and food prices, the inflation is being caused by a shift in the aggregate supply (or “the total amount of goods and services that all industries in the economy will produce at every given price level”), namely SRAS₁ shifting left to SRAS₂ (Blink 179). The equilibrium point is now above the previous price level, hence the inflation, and below the Natural rate of employment, Y_F, thus increased unemployment. The combined inflation and increased unemployment is known as stagflation, which can be illustrated in the Phillips curve, where PC₁ shifts right to PC₂.

The unemployment resulting from stagflation is one of the main reasons that wages are unable to keep up with inflation at the moment. With unemployment at a high 8.8%, companies are able to find plenty of labor without having to increase wages. This eases company concerns over the rising energy and food prices, as they won’t have to worry about additional costs found in the increase of wages.

In the short run, laborers are being adversely impacted. Because inflation rates are higher than the rate of wage rises, inflation-adjusted wages of workers has decreased. They are now less able to buy goods and services. Furthermore, workers are unable to push for higher wages due to the high unemployment rate, because companies can easily find workers willing to work for the current wages. On the other hand, companies are benefiting from the combined inflation and unemployment, making profits from the rising prices and not needing to increase costs by increasing wages.

Since SRAS₂ (and the point of equilibrium) is currently to the left of the LRAS curve, the long term will see an inevitable return of the equilibrium back onto the LRAS. Should policymakers wait, prices and wages will eventually adjust, thus shifting SRAS right, returning equilibrium to the LRAS. Or, policymakers can take action in the form of monetary or fiscal policy to increase aggregate demand, defined as “the total spending on goods and services in a period of time at a given price level” (Blink 169). This will also shift the equilibrium onto the LRAS, but will also raise prices further; nevertheless, it will solve the unemployment.

The article, CNN: China’s Inflation problem, addressed the issue of inflation in China, which is becoming an increasing concern for the governments. Inflation can be defined as “a persistent increase in the average price level in the economy, usually measured through the calculation of a consumer price index.” (Blink 201). The existence of inflation, however, is not unnatural at all, considering China’s energetic monetary growth within the last few decades.

China’s central bank has addressed this issue with monetary policies. Monetary policies may be viewed as “the set of official policies governing the supply of money in the economy and the level of interest rates in an economy” (Blink 176). In general, all monetary policies are related to money. To fight inflation, it would be very desirable for China to tighten its money supply, which is still growing at nearly 20% yearly. With this in mind, China is raising its interest rates so that the cost of borrowing, mortgage interest payments and incentive to save rather than spend may increase. What this might do for the economy is that it may very well increase the value of the Chinese Yuan.

Since consumers are now less willing to invest or spend, a natural decrease in aggregate demand (AD) or “the total spending on goods and services in a period of time at a given price level, and it’s components are consumption, investment, government spending, and net exports.” (Blink 169) is likely to occur. As the AD curve shifts downwards, the new equilibrium of AD and short run aggregate supply (SRAS) will have a lower average price level as well as real output in comparison with the previous equilibrium. If we were to look at the long run aggregate supply, a decrease in the average price level should most likely occur thereby solving the issue of inflation.

While this monetary policy was, in fact, put into act, it may not seem to be enough for China’s ever-growing economy. According to this article, “China has slowed down its inflation rate but only modestly.” China may very well have to resort to fiscal policies to reduce aggregate demand. Fiscal policies are defined as “the set of a government’s policies relating to its spending and taxation rates” (Blink 175). An effective contractionary, or deflationary, fiscal policy could help solve the inflation problem but it is also important to consider that implementing deflationary policies such as raising taxes may upset many people.

Swedish Flag

According to “Swedish GDP to Grow 4.2% in 2011 as Employment Rises, Nier Says” the Swedish GDP will grow to 4.2% end of this year due to the rapid increase in the employment rate. This relates to the concept of Gross Domestic Product found in 3.2 of the IB Economy Syllabus.

A Gross Domestic Product is defined as “…the total of all economic activity in a country, regardless of who owns the productive assets.” (Blink 152) One of the main determinants of GDP is the change in the aggregate demand. Aggregate demand is defined as “the total spending on goods and services in a period of time at a give price level”(Blink 169) which is affected by the consumption of consumers. As the employment rate rises, the income will also change. Due to the increase in income, people will have more money to spend on goods and services hence increasing consumption. This shows the correlation between the increase in employment and the GDP of a country.

In the short run, this increase in the GDP will enable Sweden to grow. In this case the shift in the AD will temporarily increase the price level of goods/services.. In the long run, unless new technology/resources is discovered, the Long Run Aggregate Supply curve will stay constant. Hence the Aggregate supply curve will shift back to the LRAS thus causing inflation in the country. According to the article the inflation will exceed 2 percent target set by the central bank. In this case, when price level increases, the value of money decreases. As a result the people will demand more wages hence cause an increase in wages. This inflation will also affect the countries that trade with Sweden. Due to inflation the countries trading with Sweden will have to pay more money to get the same amount of goods/services.

The current economic recession that has hit much of the world has caused many macroeconomic problems, such as high inflation, unemployment, and more for many nations across the globe. Nations like the United States have especially been in an economic downturn with the widespread unemployment as discussed in this article. As stated, “Michigan, whose unemployment rate has topped 10 percent longer than that of any other state”, is reflective of most situations for individual states. However, unlike other states thus far, Michigan’s government has taken action against their high unemployment rate by enacting a law that will “lead the state to pay fewer weeks of unemployment benefits next year than any other state”. Their unemployment benefits have been shortened from 26 weeks to only 20 weeks beginning next year. Many have expressed outrage to this law, particularly the unemployed, as it seems to be counterintuitive to their current and probable future plight. However, from the government’s standpoint, cutting unemployment benefits, ceteris paribus, will help in lowering the sky-high unemployment of the state. This market-oriented supply-side policy deals with the macroeconomics section of the economics syllabus.

From the government’s standpoint, their new law was the result of a number of stimuli. Overall, it was due to the economic recession, but compounding problems included the prolonged unemployment rate as well an insolvent unemployment trust fund plus a $4 billion debt to the federal government. Initially, the government of Michigan tried to raise unemployment taxes on businesses to help burden the unemployed, however this was not enough. The new law for cutting unemployment benefits will, in theory, help to increase both the long-run aggregate supply (LRAS) and the short-run aggregate supply (SRAS) in the market diagram for Michigan, thereby decreasing the natural unemployment rate and increasing real output. The SRAS will shift to the right or increase indirectly as a result of a change in people’s expectations. Originally, people who had lost their jobs due to the recession had expected to continue receiving unemployment benefits for 26 weeks, however with the reduction to 20 weeks, people will have an incentive to try and find a job. Producers seeing that there is a high demand for jobs in the market, can lower factor costs such as wage rates. People will still fill available jobs, even if it means a low pay, which in turn will increase production and shift SRAS to the right. This would move the original equilibrium that was on the left side of the LRAS due to the recession, back along the LRAS at full employment, and at a lower price level. In the long-run, the LRAS will shift and the natural unemployment rate will decrease as well because of an increase in the quantity of the labor force which is a factor of production. However, one major issue with this new law is the availability of jobs for the unemployed to fill. Currently, there are few available jobs and so even though this law might work in theory, the only way to make it more effective would be for governments to increase the number of available jobs. This might include government-funded projects.

The main stakeholders in this situation are the Michigan government, the producers, and the laborers. With the enactment of the unemployment benefits cut, in the long-run the Michigan government’s debt towards the federal government could slowly be paid back, while the state’s output could gradually increase and its natural unemployment rate could decrease. The producers in Michigan are greatly benefitted by the new law both in the long and short run. They are able to hire cheaper labor while decreasing factor of production costs, and thus increasing their output. Most affected by the new law however, would still be the unemployed laborers. In the short run, they might have an increased incentive to find a job, yet nevertheless if there are no jobs, then they can only either continue to live on unemployment benefits or move out of Michigan and seek employment elsewhere. In the long run, future unemployed would suffer, as they will get fewer benefits and will have to be quickly reemployed. Through this unemployment benefits cut, there is a chance that Michigan will be able to accomplish its goal of decreasing the unemployment rate and moving itself out of a recession. Other states are following in Michigan’s footsteps and taking similar measures to deal with their own high unemployment rate.