Inflation in Vietnam

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DEPARTMENT OF MANAGEMENT AND MARKETING
Macroeconomic Assignment
Topic: Inflation in the economy and selected measures against inflation

TABLE OF CONTENT

1. OVERVIEW OF ECONOMIC PERFORMANCE IN VIETNAM
Vietnam joined the World Trade Organization in January 2007 and transformed from a heavily indebted country to a low middle income one in 2010. After opening up the country’s economy to foreign investors, its GDP grew by 7.3% on average from 2001 to 2010. While Vietnam survived the global slowdown of 2008 quite well relative to its neighbors with GDP growing by 6.8% in 2010. In 2011, Vietnam has experienced persistently high inflation at 23%. The economic growth rate is no longer the
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Saving becomes more attractive: firms and households are more likely to keep saving money in the bank rather than spend.
Reduced disposable income: households with a variable mortgage will see a rise in monthly mortgage interest payments. Therefore, they will have less income to spend.
Overall, the money supply decreased. The decline in money supply causes an imbalance in the money market. At a given interest rate (i1) and the income (Y1) there is the excess demand for real money balances over supply. LM curve shifts to the left. Growth in interest rates causes a decrease of autonomous expenditures sensitive to interest rates. These autonomous expenditures sensitive to interest rate are investment and consumption. Equilibrium output of the economy falls to the level Y2 as described in the graph below.

On open market operations, interest rate rose from 7% to 12% per annual to restrict the supply of money to the economy. An increase in the interest rate reduces investment by making it more expensive for firms to borrow money to make investment purchases and also by increasing the opportunity cost for those who plan to finance investment projects using their own funds.
The rises in interest rates cause difficult for businesses, especially small and medium sized ones to access capital, forcing them to
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