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By the end of this section, you will be able to:
  • Identify the causes and effects of inflation in various economic markets
  • Explain the significance of a converging economy

Policymakers of the high-income economies appear to have learned some lessons about fighting inflation    . First, whatever happens with aggregate supply and aggregate demand in the short run, monetary policy can be used to prevent inflation from becoming entrenched in the economy in the medium and long term. Second, there is no long-run gain to letting inflation become established. In fact, allowing inflation to become lasting and persistent poses undesirable risks and tradeoffs. When inflation is high, businesses and individuals need to spend time and effort worrying about protecting themselves against inflation, rather than seeking out better ways to serve customers. In short, the high-income economies appear to have both a political consensus to hold inflation low and the economic tools to do so.

In a number of middle- and low-income economies around the world, inflation is far from a solved problem. In the early 2000s, Turkey experienced inflation of more than 50% per year for several years. Belarus had inflation of about 100% per year from 2000 to 2001. From 2008 to 2010, Venezuela and Myanmar had inflation rates of 20% to 30% per year. Indonesia, Iran, Nigeria, the Russian Federation, and Ukraine all had double-digit inflation for most of the years from 2000 to 2010. Zimbabwe had hyperinflation, with inflation rates that went from more than 100% per year in the mid-2000s to a rate of several million percent in 2008.

In these countries, the problem of very high inflation generally arises from huge budget deficits, which are financed by the government printing its domestic currency. This is a case of “too much money chasing too few goods.” In the case of Zimbabwe, the government covered its widening deficits by printing ever higher currency notes, including a $100 trillion bill. By late 2008, the money was nearly worthless, which led Zimbabwe to adopt the U.S. dollar, immediately halting their hyperinflation. In some countries, the central bank makes loans to politically favored firms, essentially printing money to do so, and this too leads to higher inflation.

A number of countries have managed to sustain solid levels of economic growth for sustained periods of time with levels of inflation that would sound high by recent U.S. standards, like 10% to 30% per year. In such economies, most contracts, wage levels, and interest rates are indexed to inflation. Indexing wage contracts and interest rates means that they will increase when inflation increases to retain purchasing power. When wages do not rise as price levels rise, this leads to a decline in the real wage rate and a decrease in the standard of living. Likewise, interest rates that are not indexed mean that the lenders of money will be paid back in devalued currency and will also lose purchasing power on monies that were lent. It is clearly possible—and perhaps sometimes necessary—for a converging economy    (the economy of a country that demonstrates the ability to catch up to the technology leaders) to live with a degree of uncertainty over inflation that would be politically unacceptable in the high-income economies.

Concepts and summary

Most high-income economies have learned that their central banks can control inflation in the medium and the long term. In addition, they have learned that inflation has no long-term benefits but potentially substantial long-term costs if it distracts businesses from focusing on real productivity gains. However, smaller economies around the world may face more volatile inflation because their smaller economies can be unsettled by international movements of capital and goods.


Retrieve inflation data from The World Bank data base (http://databank.worldbank.org/data/home.aspx) for India, Spain, and South Africa for 2008–2013. Prepare a chart that compares India, Spain, and South Africa based on the data. Describe the key differences between the countries. Rank these countries as high-, medium-, and low-income. Explain what is surprising or expected about the data.

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Questions & Answers

how can the demand side approach solve unemployment
Tshepiso Reply
demand side approach to solve unemployment
Tshepiso Reply
no get ur questions
differentiate between choice and scale of preference
choice are the various wants of every individual whiles scale of preference is the list of unsatisfied wants arranged in order of important priority
choice refers to the act of selecting from alternatives or it refers to the act of choosing one thing instead of the other but Scale of preference refers to the listing of wants in order of important by providing the pressing need on top and the less pressing need at the bottom
four cardinal types of demand
Henry Reply
what are the types of demand
they are the derived,complementary,substitute and supplementary demands
What is equilibrium
equilibrium is the state of balance where there is no tendency for a change to occur.
Derived, competitive, complementary and composite demands
why is economics said to be a dismal science?
hi friends
fyn what is meaning of monopoly
monopoly is when a particular good is produced without competing with any other good.
With the aid of diagrams,compare the short run equilibrium positions of a perfect competitor and an imperfect competitors
Monlay Reply
What is the term consultation in economics?
Nthabiseng Reply
why is it that the long run Average cost curve does not touch that of the short run curve at its minimum?
Baah Reply
In few words, what is the role of interest rate in economy?
Carlos Reply
what is population
Nyakeh Reply
total number of people in a given area or country
the total number of people at a given area or country
total number of people in a given area or country
What is price Elasticity of demand?.
The responsiveness of the quantity of a commodity demanded to a change in its price, expressed as the percentage change in quantity demanded divided by the percentage change in price.
why is it that the long run Average cost doesn't touch the short run cost curve at its minimum?
what is supply
please rice and beans will be what type of demand but note we mostly cook it together
Oladosu Reply
complementary or joint demand
but did you know you can demand for rice without beans so how is it joint or complementary
From my point of view, rice and beans are replaceable goods, hence they can't be complementary.
what are the money value
Wisdom Reply
Nothing more than a purchase power, in other words, $100 now, must have the same value after 1 year.
what is Monopoly
Rebecca Reply
what is money
Lawal Reply
It can be define as a big transaction that can control any business for one place to another base.
money is recognisable note to accept both parties selling and buying
i don still understan
money is anything generally accepted as a medium of exchange
Money is anything generally accepted as a medium of exchange and for the settlement of goods and services .
hi good ppl, pls help out
discuss human and natural resources as develop strategies ro improving living condition of citizens in developing countries.
I don't understand the question.
it's a form of currency used for 2 or more individuals or parties in order to reach their amicable personal or business attainment. one must understand that money itself can manifest in multiple fashions for which the individuals or parties adheres.
are u trying to say we shld discuss ways in which human natural resources help in improving living condition of citizens in developing countries?
money is a legal thunder generally accepted as a medium of exchange for the payment of debt ,goods and services
money is a way of payment.
money is any thing that is generally accepted as a medium of exchange good for good and settlement of debt and means of payment
money is nothing but a object which is used for exchange of goods and services.
money is anything that is generally accepted as payment of goods and services and settlement of debt
what is demand
Melissa Reply
demand is where the customer is willing and able to buy goods and services during a given period of time
demand is the ability and willingness of an individual to buy goods and services at a given price in a particular period of time
demand is the ability to buy a specific quantities of goods and services at a given price and at a specific period of time
what are the rules of demand
Rosemary Nsebon, Do you mean laws of demand?
what are the rules of demand
the rule of demand is the higher the price the lower the quantity demanded and the lower the price the higher the quantity demanded
what is unemployment
unemployment is a scenario or a phenomenon in an economy whereby people are willing are able to work but cannot a job
Suppose you have a team of two workers: one is a baker and one is a chef. Explain why the kitchen can produce more meals in a given period of time if each worker specializes in what they do best than if each worker tries to do everything from appetizer to dessert. please I need a urgent answer
Oladosu Reply
Enables individuals and countries to consume a variety of goods and services

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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