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Inflation Essay

868 words - 4 pages

What policies can a government and central banks undertake to increase inflation in the Eurozone?

One way in which governments and central banks could increase inflation is by the application of Quantitative easing. This would mean that AD would increase price and price levels raise, thus increasing levels of inflation. What QE is, is the banks buying government bonds or gilt’s from private sector companies, this will make the price of the gilts rise and making them a less attractive investment. Companies can then use the money to invest in other things. This will also raise money supply by lowering interest rates. This will lead to businesses being able to borrow at cheap, for these ...view middle of the document...

Through a downgraded currency there will be an increase in exports, this means that domestic firms will be selling more units of production and they will be shifting out their Aggregate demand across the Eurozone. This will raise inflation rates within the country and subsequently with the Eurozone.

This is dependent on the foreign investors’ confidence, for example if the interest rates are low at one stage but known to drift and be volatile, therefore could go up or down at any time then a foreign Eurozone partner is unlikely to put confidence into your country, this will mean that exports do not rise and the domestic firms are not shifting their Ad as they would like and for that reason the inflation rates would not be raising.
Another policy that the central bank could implement to increase inflation is an expansionary fiscal policy. This would mean that taxes would be lowered and government spending would be increased, this is common in times of depression as it raises consumer confidence and their ability to spend money on goods and services that will shift out the AD curve. This would then push up the price levels in Eurozone economies and raise inflation. The same will apply to business of all sizes, they are all effected by a lowering of taxes. Whether they are corporation or income taxes the affect is similar, when the taxes are lower the business is able to spend more on making better quality products that they can then sell for higher prices and to a wider market. The may even be able to...

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