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Comparison Of Inflation, China And The Us

1919 words - 8 pages

Comparison of Inflation, China and the US

ECON220: Principles of Macroeconomics

Comparison of Inflation, China and the US
Inflation is a persistent increase in the price of different commodities without a corresponding change in quantity demanded. As such, inflation is a macroeconomic indicator used to measure economic performance of a nation. This research paper sets out to compare inflation in China and United States.
The Chinese economy is recorded as one of the strongest and fast growing economy in the world. In the last two decades, the economy has recorded a fall in unemployment and economic growth, but inflation persists. With the economy, engaging in vigorous policy and ...view middle of the document...

The volatility of economic growth rate has left many people without employment and this is a major cause for concern. In addition, inflation is persisting with the rate of inflation ranging at 1.7 precent. (Mataloni, 2012).
Importance of inflation
The market forces determine inflation rates and as such, the economy faces the risks of uncertainty because prices fluctuate on a daily basis. Therefore, it brings confusion among importers and exporters since they are not sure of the exact price. In addition, it may act as an impediment to investment, and the economy is at risk of lacking investment both internal and foreign investment. The other risk is that an economy is vulnerable to high inflation rates, and as a result, an economy will face adverse economic times. Furthermore, an economy will be exposed to the risks of speculation; this will destabilize and damage the economic performance of the country. An economy will also face the risks of mounting deficits in relation to balance of payment deficits. Private spending leads to inflation, which affects aggregate demand, hence low employment creation rates and growth levels (Stock & Watson, 2007).
People's Bank of China as a monetary policy to revive and boost economic growth decided to cut interest rates to 6.06 precent by 25 basis points in the second and third quarter of 2012. The poor economic growth experienced in China is due to the slowdown in the United States and euro zone. The monetary policy was adjusted because there was a gradual ease in inflation pressures as indicated by low external demands, appreciation of renminbi, as well as home economy slow down. The Central Bank of China will also reduce the reserve requirement ratio by 50 basis points. The fall in consumer price index to 3.33% in 2012 as compared to a 5.4% in 2011 offers leeway for the People's Bank of China to relax its monetary policy as the local economy register poor performance. It is indispensable for the central bank to relax its policies in order to boost growth.
Furthermore, the China's economy in the last two years has experienced negative real interest rate. This implies that deposit interest rates should remain constant, but the loan interest rate should be cut. This will encourage investment and boost domestic demand (Chang & Lee, 2010).
Measures to Combat Inflation
Policy instruments are defined as the available options that can be utilized by the government to run economic activities. Instruments are classified as either monetary policy or fiscal policy. Fiscal policy refers to those actions undertaken by the government in relation to its level and composition of expenditure, borrowing and taxation with the main objectives being to spur economic growth, lower unemployment rate, manipulate growth and level of output and aggregate demand (Beechey & Osterholm, 2012).
Monetary policy refers to the actions pursued by the central bank of a country so as to regulate the amount of money...

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