price stability

Examples of price stability in the following topics:

• Macroeconomics

  • Price stability occurs when prices remain largely stable and there is not rapid inflation or deflation.
  • Price stability is not necessarily zero inflation; steady levels of low-to-moderate inflation is often regarded as ideal.
  • These models rely on aggregated economic indicators such as GDP, unemployment, and price indices.

• Volcker Disinflation

  • Paul Volcker, the 12th Chairman of the Federal Reserve, became known for lowering the inflation rate and achieving price stability.
  • Volcker's tenure as the chairman of the Federal Reserve resulted in sound monetary and fiscal integrity that achieved the goal of price stability.

• Defining Fiscal Policy

  • Governments use fiscal policy to influence the level of aggregate demand in the economy in an effort to achieve the economic objectives of price stability, full employment, and economic growth.
  • In times of economic boom, Keynesian theory posits that removing spending from the economy will reduce levels of aggregate demand and contract the economy, thus stabilizing prices when inflation is too high.

• Reasons for and Consequences of Shift in Aggregate Supply

  • In economics, the aggregate supply shifts and shows how much output is supplied by firms at different price levels.
  • It is the total amount of goods and services that firms are willing to sell at a specific price level in the economy.
  • When the curve shifts to the right, it causes an increase in the output and a decrease in the GDP at a given price.
  • The short-run aggregate supply curve is affected by production costs including taxes, subsidies, price of labor (wages), and the price of raw materials.
  • In the long-run the prices stabilize and the price level of the good or service increase in response to the changes.

• The Structure and Function of Other Banks

  • In contrast with the Federal Reserve, the ECB has the primary objective of maintaining price stability within the Eurozone, but is not charged with regulating unemployment or economic output.
  • The primary goals of the Bank of England are to maintain price stability and support the economic policies of the government.
  • The recently-established Financial Policy Committee is responsible for regulating the UK's financial sector in order to maintain financial stability.
  • It is responsible for making and implementing monetary policy for safeguarding the overall financial stability and provision of financial services.
  • It is divided into 18 functional departments that oversee such issues as monetary policy, financial stability, anti-money laundering, and legal affairs.

• Monetary Policy and Fiscal Stabilization

  • Later, when the government sold large amounts of Treasury securities to finance the Korean War, the Fed bought heavily to keep the prices of these securities from falling (thereby pumping up the money supply).
  • Eisenhower (1953-1961), for instance, the Fed emphasized price stability and restriction of monetary growth, while under more liberal presidents in the 1960s, it stressed full employment and economic growth.
  • The growing importance of monetary policy and the diminishing role played by fiscal policy in economic stabilization efforts may reflect both political and economic realities.

• Introduction to Monetary Policy

  • Monetary policy is the process by which a monetary authority controls the money supply, often to produce stable prices and low unemployment.
  • Monetary policy is the process by which the monetary authority of a country, which could be a government agency or a central bank, controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.
  • The official goals usually include relatively stable prices and low unemployment.
  • Since interest rates represent the price of money, lower interest rates will cause the quantity of money demanded to increase, stimulating investment and spending.
  • Suppose, for example, that high short-run aggregate demand creates an equilibrium in which prices are higher than in the long-run equilibrium.

• The Creation of the Federal Reserve

  • The Federal Reserve was created to promote financial stability, provide regulation and banking services, and conduct monetary policy.
  • The Act established three key objectives for monetary policy: maximum employment, stable prices, and moderate long-term interest rates.
  • Over the years, the Fed has expanded its duties to include conducting monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system, and providing financial services.
  • Recall that the interest rate that the government pays is determined by the price of the bond: the higher the price of the bond, the lower the interest rate.
  • Buying or selling bonds changes the demand or supply of the bonds, and therefore their price.

• Farm Policy of the 20th Century

  • Farm prices were high as demand for goods increased and land values rose.
  • The good years of the early 20th century ended with falling prices following World War I.
  • Although the board could not meet the growing challenges posed by the Depression, its establishment represented the first national commitment to provide greater economic stability for farmers and set a precedent for government regulation of farm markets.
  • The government also adopted a system of price supports that guaranteed farmers a "parity" price roughly equal to what prices should be during favorable market times.
  • By restricting sales, such orders were intended to increase the prices that farmers received.

• Fiscal Policy and Economic Stabilization

  • In the 1930s, with the United States reeling from the Great Depression, the government began to use fiscal policy not just to support itself or pursue social policies but to promote overall economic growth and stability as well.
  • Wages and prices started rising.
  • Soon, rising wages and prices fed each other in an ever-rising cycle.
  • Such an overall increase in prices is known as inflation.
  • To fight inflation, he established a program of voluntary wage and price controls.