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Economics Ia: Macroeconomics Essay

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Inflation in India Jonah Soble
This article pertains to a major change in the rate of inflation starting in the middle of 2010. Inflation is defined as a persistent increase in the average price level in the economy. When inflation occurs, there is a sustained increase in the price level. As described in the article, due to the overwhelming rate of inflation, there is a decrease in factory output. The other negative consequences of inflation are: a loss of purchasing power, a negative real rate of interest, an increase in nominal interest rates from banks, and labor unrest. However, the most important problem due to inflation is the uncertainty that will spread through the economy. Firms will not be able to plan ahead and calculate the costs of their production. Therefore they will not be able to invest.

Now that the inflation in India is above 8%, the government must bring the rate of inflation down to a target rate of approximately 3%. In order to do this, the Central Bank of India, which is designed to oversee the banking system and regulate the quantity of money in the economy, must raise interest rates by selling securities through the Open Market Operations. Open Market Operations is one of the tools used by the Central Bank of India that controls interest rates. Open Market Operations are made up of Monetary Policy. Monetary Policy refers to the Central Bank reducing money supply to affect interest rates. The other tools that are used by the Monetary Policy are the Discount Rate and the Reserve Requirement. On the monetary side, the Central Bank of India cut interest rates six times from October 2008 to April 2009. Cutting interest rates would eventually slow down the economy and increase taxes for the people of India. As shown in the diagram below, the ‘balloon’ represents India’s Economy.   The ‘air’ being blown into the balloon represents less government spending. What is coming out of the balloon represents the result of less government spending,...

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