Philippine Economic Issues

Topics: Inflation, Monetary policy, Macroeconomics Pages: 3 (1819 words) Published: January 25, 2013
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...
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