Philippine Economic Issues

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1. I disagree with the statement “Inflation doesn’t benefit anyone in the economy” because inflation primarily determines the price stability in the country, and states that there is an ongoing economic activity. This economic activity can be determined through investments running in the country. Inflation will benefit citizens as long as it is between the targeted inflation rate of that certain country. An example would be the recent inflation rate in the Philippines wherein it was leaning towards 2.6% which was lower than the expected 3-5% rate. To solve this (and increase inflation rate), BSP made an overnight interest rate where they decreased the interest rate. This will eventually result to many borrowing from the bank which implies the lower cost of borrowing and lower cost of production. Thus, lower prices which induce high demand. High demand will then contribute to a higher profit which will encourage higher investment. High investment determines an increase in money supply which then increase inflation rate. When the inflation rate in a country is high, its exchange rate is expected to depreciate. This is because the value of local/domestic currency in the said country is decreased due to probably an increase in money supply as opposed to foreign money supply. This will encourage foreigners to invest in the country since their money has a great value when exchanged in the country. With an increased dollar, the country will have more purchasing power in terms of import. The country’s citizens may also be encouraged to invest in exporting products. If a bank increases its interest rates, say 5%, (borrowing), this will encourage many to invest in that certain bank to reduce opportunity cost and in order to gain interest income when his/her money matures. The invested money will be lent and will be borrowed by a firm in which the bank will charge interest to the borrower, say 12%. Then the firm who borrowed has to have 20% sales in order to gain profit of 8%. The investment which goes along with interest rates increases money supply in the country. 2. Since the economy is suffering from a severe inflationary problem, high unemployment, and low growth, it means they are experiencing recession. Recession together with the balance of payments deficit means that they are in quadrant 3. In order to attain both internal and external balance, the country must use and implement expansionary fiscal policy and contractionary monetary policy. The first policy that must be implemented is expansionary fiscal policy because this initially means an increase in government spending and/or decrease in taxes. Decreased taxes will lead to a higher disposable income. Government spending such as infrastructures will lead to more employment opportunities which would help in full employment. If many will be employed, many will have the capacity to purchase. Thus, higher purchasing power means higher demand and higher consumption. These will help to the economic growth of the country. Higher interest rates caused by both expansionary fiscal policy and contractionary monetary policy will reduce investment which will help reduce the inflationary pressures. Conversely, an increase in interest rate will encourage depositors to deposit in banks which will be lent to firms or individuals. Although the interest rate which will be charged to the borrower is high, it may induce inflation since the cost of borrowing increased which results to higher prices to protect their profit. Since the expansionary fiscal policy may induce inflation which will then devaluate the local currency, the exchange rate depreciates then. Currency also depreciates due to lack of dollars in the country but with high demand since high interest rates discourage domestic borrowing. If the exchange rate depreciates, foreigners will be encouraged to invest in the country since their money has a greater value. The depreciated exchange rate may also induce many to export...
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