inflationary policy

(noun)

In economics, this is a policy that leads to a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, it also reflects an erosion in the purchasing power of money, or a loss of real value in the internal medium of exchange and unit of account in the economy.

Related Terms

Examples of inflationary policy in the following topics:

  • The Economy and the Silver Solution

    • Free Silver was a central American policy issue in the late 19th century.
    • Its advocates were in favor of an inflationary monetary policy using the "free coinage of silver" as opposed to the less inflationary Gold Standard.
    • The question was whether or not this inflationary measure would be beneficial.
    • Many populist organizations favored an inflationary monetary policy on the grounds that it would enable debtors, often farmers who had mortgages on their land, to pay their debts off with cheaper, more readily-available dollars.
    • Those who suffered under this policy were the creditors such as banks and landlords.

  • Macroeconomic Factors Influencing the Interest Rate

    • In economics, a Taylor rule is a monetary-policy rule that stipulates how much the Central Bank should change the nominal interest rate in response to changes in inflation, output, or other economic conditions.
    • If the inflationary expectation goes up, then so does the market interest rate and vice versa.
    • That is, the rule "recommends" a relatively high interest rate (a "tight" monetary policy) when inflation is above its target or when output is above its full-employment level, in order to reduce inflationary pressure.
    • It recommends a relatively low interest rate ("easy" monetary policy) in the opposite situation to stimulate output.
    • Overnight rates in Turkey are estimated to fall in 2013, indicating a loosened monetary policy.

  • The Effect of Expansionary Monetary Policy

    • Monetary policy is referred to as either being expansionary or contractionary.
    • Expansionary policy seeks to accelerate economic growth, while contractionary policy seeks to restrict it.
    • Expansionary policy attempts to promote aggregate demand growth.
    • Monetary policy focuses on the first two elements.
    • The increase in the money supply is inflationary, though it is important to note that, in practice, different monetary policy tools have different effects on the level of inflation.

  • Stability Through Fiscal Policy

    • Governments can use fiscal policy as a means of influencing economic variables in pursuit of policy objectives.
    • Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of:
    • In the classical view, the expansionary fiscal policy also decreases net exports, which has a mitigating effect on national output and income.
    • This is because, all other things being equal, the bonds issued from a country executing expansionary fiscal policy now offer a higher rate of return.
    • Other possible problems with fiscal stimulus include the time lag between the implementation of the policy and detectable effects in the economy, and inflationary effects driven by increased demand.

  • Long-Run Implications of Fiscal Policy

    • Expansionary fiscal policy can lead to decreased private investment, decreased net imports, and increased inflation.
    • That being said, these changes in fiscal policy can affect the following macroeconomic variables in an economy:
    • Economists still debate the effectiveness of fiscal policy to influence the economy, particularly when it comes to using expansionary fiscal policy to stimulate the economy.
    • Other possible problems with fiscal stimulus include inflationary effects driven by increased demand.
    • If a country pursues and expansionary fiscal policy, high inflation becomes a concern.

  • Drivers of Market Interest Rates

    • Market interest rates are mostly driven by inflationary expectations, alternative investments, risk of investment, and liquidity preference.
    • Inflationary expectations: Most economies generally exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now.
    • If the inflationary expectation goes up, then so does the market interest rate and vice versa.
    • However, economists generally agree that the interest rates yielded by any investment take into account: the risk-free cost of capital, inflationary expectations, the level of risk in the investment, and the costs of the transaction.
    • where in is the nominal interest rate on a given investment, ir is the risk-free return to capital, pe = inflationary expectations, i*n = the nominal interest rate on a short-term risk-free liquid bond (such as U.S.

  • Interest Rates and Economic Rationale

    • The interest rate guides economic rationale because it is a vital tool of monetary policy.
    • Interest rates also influence inflationary expectations.

  • The Farmer's Alliance

    • The Farmers' Alliance also generally supported the government regulation of the transportation industry, establishment of an income tax in order to restrict speculative profits, and the adoption of an inflationary relaxation of the nation's money supply as a means of easing the burden of repayment of loans by debtors.
    • The Southern Alliance also demanded reforms of currency, land ownership, and income tax policies.

  • Arguments For and Against Inflation Targeting Policy Interventions

    • Inflation targeting is an economic policy in which a central bank publicly determines a target inflation rate and then attempts to steer actual inflation towards the target.
    • High levels of inflation eat away at savings, increase menu costs and shoe-leather costs, discourage lending, and may create an inflationary spiral that leads to hyperinflation.
    • Further, inflation targeting is a transparent way to explain interest rate policy and to anchor consumers' expectations about future inflation.

  • A New Economy?

    • Today, Federal Reserve economists use a number of measures to determine whether monetary policy should be tighter or looser.
    • Unexpectedly modest demands from workers for wage increases -- a result, possibly, of the fact that workers felt less secure about keeping their jobs in the rapidly changing economy -- also helped subdue inflationary pressures.