The Government Should Play an Active Role in Managing an Inflationary Economy

Topics: Inflation, Macroeconomics, Monetary policy Pages: 4 (970 words) Published: December 8, 2012
The government should play an active role in managing an inflationary economy.

I agree that the government should play an active role in managing an inflationary economy. Buck (2011), stated that “The overwhelming majority of economists around the world believe it is appropriate for the government to take actions to promote economic growth and maintain low unemployment and low inflation.”

Parkin (2012: 522) described inflation as “a persistently rising price level” and price level as “the average level of prices, and the value of money”. A price increase would cause people to buy less, and a decrease in demand for products would cause prices to fall. Parkin (2012) said that expected inflation is promoting a healthy and a strong economy. However, if the burst of inflation is unanticipated, it brings big problems and risks. Employees are worse off because their earned income to get less than before due to price hike. Conversely, employers receive higher profits and better return on their investment, which leads to an increase in investment, production boom and real GDP rises with lower unemployment rate. However, this situation is temporary, spending cools and investment drops, following a fall in GDP and rising unemployment rate. Unexpected inflation redistributes wealth between borrowers and lenders. The borrower pays the fix rate loan with lesser dollars and brings an impact to lenders such as banks and other financial institutions. In summary, we can not wait macroeconomic to correct itself and the government should take measures to control inflation, ease economic uncertainty and restore economic stability.

In fact, most governments use both monetary and fiscal policy to maintain the currency stability and inflation and unemployment at a balanced growth. US Department of States (2009a), stated that during the 1930s the great depression period, US economy is severely impacted by weak global & domestic economic growth and high unemployment rate. When...
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