Use a simple model to show that the control of inflation at a low level requires precommitment by the policymaker. What kinds of pre-commitment are possible, and what kinds have been most used in the last two decades?

Use a simple model to show that the control of inflation at a low level requires precommitment by the policymaker. What kinds of pre-commitment are possible, and what kinds have been most used in the last two decades?

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter27: Issues In Macroeconomic Theory And Policy

Section: Chapter Questions

Problem 6P

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Concept explainers

Inflation and Purchasing Power Theory

In economic terms, Inflation refers to the increase in the costs of various commodities which are used in daily lifestyle like food, clothes, transport, etc. over a specific time. It may lead to a fall in the purchasing power of the people and also affects the exchange rate of the currency because of the price increase. As the purchasing power falls the unit of the currency in the economy falls. When the prices of the commodities are decreased, then the purchasing power of the consumers will rise, then it will lead to deflation and changes the currency of the base economy to that of the foreign economy which will lead to change in exchange rates.

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Use a simple model to show that the control
of inflation at a low level requires
precommitment by the policymaker. What
kinds of pre-commitment are possible, and
what kinds have been most used in the last
two decades?

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