Macro Economics Analysis

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Economics 100

Assignment option 2

Lecture: Ms Maria Lantzke
Thursday 8.30 am to 12.30 pm
Table of contents
1. Article summary ………………………………………………………. 3 2. Introduction …………………………………………………………..... 3 3. Analysis .....................................................................................................3 1. UK Inflation Rate ……………………………………………….. 3 - Definition of inflation ……………………………………….... 3 - Causes of inflation ……………………………………………. 4 2. Consumer price index ………………………………………….....5 - Definition of Consumer price index …………..……………… 5 - Increasing CPI in UK..………..………………………………. .5 3. Business cycle …………………………………………………….6 - Definition of Business cycle ………………………………...…..6 - Business cycle in UK……………………………..……………...6 3.4 Interest rate and monetary policy ………………………………....6 - Expansionary monetary policy………..…………………………6 - Contractionary monetary policy……………….….....…..……….7 4.0 Conclusion ……………………………………………………………….9 5.0 Reference list ……………………………………..……………………...10

1.0 Article summary
This article called “UK inflation rate rises to 4% in January” was posted on February 15, 2011 by BBC. It displays increased inflation rate in Unites Kingdom. Indeed, The UK Consumer Prices Index (CPI) annual inflation rate rose to 4% in January. This CPI figure picked up highest since November 2008. Monetary policy committee (MPC) is considering a possible increase in the interest rate to try to cool inflation. However there are contrasting opinions about when the Central Bank should increase it. In addition, the article refers to the causes of inflation. Mr. King, the Bank of England governor, recognizes possible causes of inflation in the VAT rise, the fall in the pound and recent rises in commodity prices. However, Chancellor G. Osborne disagrees about the VAT rise as a cause of inflation. Furthermore, in this article there are more others causes of inflation: the high price of petrol and crude oil, global changes in the price of foods and commodities.

2. Introduction
This report provides an analysis of inflation in UK with applying some economics theories. The inflation rate picked up 4% in January which is highest since November 2008. In this article there are four main concepts of macroeconomics, such as inflation and CPI, interest rate and monetary policy. The purpose of the report is to describe the economic problems in England, through the analysis of these economics theories.

3.0 Analysis
3.1 Inflation rate
Inflation is the sustained increase in the general level of prices in the economic (Hubbard et al. 2010). It’s measured by the price level, which measures the average prices of goods and services in the economy. The figure of percentage increase in the price level from one year to next is called inflation rate. In UK, the inflation rate rose above the 2% target. Bank of England governor, Mr. King, believes the inflation will rise towards 5% in the next months and MMC thinks that high inflation is just temporary as it will fall below the target in 3 years. However, Inflation below the target of 2% is judged to be just as bad as inflation above the target.

Causes of inflation
Inflation is usually categorized as demand-pull or cost-push. Demand-pull inflation is a rise in general price level in the economy caused by an increase in the aggregate demand and production levels are not able to meet the high demand immediately (Hubbard et al. 2010) Cost push inflation is a rise in general price level in the economy caused by a decrease in the aggregate supply of goods and services. Aggregate supply decrease when there is an increase in price of inputs, such as raw materials, equipments, machinery.

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Figure 1 Cost-push inflation
Figure 1 shows the process of cost-push inflation; 1. The economy is originally at equilibrium at point A, with the price level P1 and...
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