Question :
Based on the great depression table, explain the inflation rate and the changes of the inflation rate from 1936 to 1939.
Definition of the inflation rate
The term "inflation" refers to a rise in the overall level of prices. In other words, many goods and services, such as housing, apparel, food, transportation, and fuel, must rise in price for inflation to occur in the overall economy. If only a few types of goods or services are increasing in price, there isn't necessarily inflation.
Apart from that, inflation can be determined in a variety of ways. Inflation is commonly measured by the Consumer Price Index (CPI), according to a September 1999 Ask Dr. Econ question "A GDP Deflator (GDP Deflator) or a Consumer Price Index (CPI) indicator can be used. The GDP Deflator measures changes in the price level of a broad basket of consumer goods, while the CPI Index measures changes in the price level of a broad basket of consumer goods."
Furthermore, the inflation rate is a key component of the misery index, which is an economic indicator that helps assess the financial wellbeing of the ordinary person. Then, another consideration is the unemployment rate. When the misery index increases above 10%, it suggests that people are facing either a recession, soaring inflation, or both. To put it another way, either inflation or unemployment is over 10%.
The changes in the inflation rate
Based on the changes in the inflation rate from 1936 to 1939, there are three main causes which are demand-pull, cost-push and expansionary fiscal policy. Following is the elaboration of the three main causes of the inflation rate:
Demand-Pull Inflation
Strong consumer demand for a product or service can lead to demand-pull inflation. Demand-pull inflation occurs when a surge in demand for goods occurs across an economy, causing prices to rise. When unemployment is low and wages are rising, consumer confidence is high, which leads to increased spending. Absolutely, consumer spending in a given economy is directly affected by economic expansion, which can result in a surge in product and service demand.
As demand for a particular good or service grows, the available supply shrinks. According to the supply and demand economic principle, when there are fewer items available, consumers are willing to pay more for them. Prices have risen as a result of demand-pull inflation.
Besides that, companies play a role in inflation as well, especially if they produce popular goods. Simply because consumers are willing to pay the higher price, a company can raise its prices. Apart from this, when the item for sale is something that consumers require on a daily basis, such as oil and gas, corporations can freely raise prices. The demand from consumers, on the other hand, gives corporations the power to raise prices.
Cost-Push Inflation
When prices rise as a result of rising production costs, such as raw materials and wages, this is known as cost-push inflation. As production costs rise, the demand for goods remains unchanged, while the supply of goods decreases. As a result, higher finished goods prices are passed on to consumers as a result of higher production costs.
In addition, wages also have an impact on production costs and are typically a company's single largest expense. If the economy is doing well and the unemployment rate is low, labour or work shortages can occur. Companies, in turn, raise wages to attract qualified candidates, resulting in higher production costs. Cost-plus inflation occurs when a company raises prices in response to rising employee wages.
Expansionary Fiscal Policy
Governments can increase the amount of discretionary income for both businesses and consumers by enacting expansionary fiscal policies. Businesses may spend tax cuts on capital improvements, employee compensation, or new hiring if the government lowers taxes. Additionally, customers have the option of purchasing more items. Increased government spending on infrastructure projects could also help to boost the economy. As a consequence, the demand for goods and services could rise, resulting in price increases.
Central banks can lower interest rates by pursuing an expansionary monetary policy. The Federal Reserve, for example, can reduce the cost of lending for banks, allowing them to lend more money to businesses and consumers. More money is available throughout the economy, which leads to increased spending and demand for goods and services.
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