Question

Compare and contrast the difference between short-term concerns of inflation caused by rising wages and the long-run goal of economic growth that influence individuals' decisions to move to Oregon. What role do policymakers' efforts to encourage long-run growth play, such as health care, infrastructure and a stable government?

Answer 1

Inflation is the gradually and continual rise in price level across all commodities . A noticeable factor is its consistency in rising, though not at the same rate, it’s a macro concept taken on an average.

In the short run a rise in price level caused be caused by either demand led factors—demand pull reasons like rise in wages, a rise in the aggregate capacity to spend leading to a rise in demand which exceeds the available aggregate supply and hence causes a rise in prices not matched by rise in output. This causes a gap between income and output , it leads to fall in the purchasing power of money and a general tendency to indulge in excessive buying , especially visible on part of consumers. It may even lead to a rise in imports.

Factors like rising costs of production, noticeable being wage costs will lead to cost push inflation. A rise in such factors may be even due to a fall in exchange rate in case factor inputs are imported, for example , a sudden rise in the price of oil may trigger a price spiral across various industries.

In the long run, the inflationary effects may lead to higher levels of output to match the rising demand , this implies that there is a rise in demand for factors of production and other non factor inputs involved in the production process, this leads to increase in income and employment levels and a rising growth rate for the economy .

The individual in question , may, in the short run be influenced by rising price levels and fall in his real income and hence may consider moving to Oregon. However in the long run, taking advantage of the economic adaptation of Oregon from primary to secondary to tertiary sectors may prove beneficial for the individual, as it increases his capacity to earn more through a wider choice of income and employment opportunities.

The governmental macro goals as well as the role of policy makers ahs always been to stabilise the general price level. There are certain mechanical stabilizer tools like reduction in governmental spending on goods and services like health care , building of infrastructure and so on. These tools cause a ‘major effect’ on the economy as their benefits are wide spread, in cases of inflation , there is a marked reduction in these expenditures leading to a noticeable reduction in the aggregate expenditure across all sectors , mainly in the consumer expenditure and the expenditure by firms. In times of a slow down of the growth rate these expenditures rise , giving the necessary fillip to the sectors especially the private sector.

In the short run such policies may diminish the aggregate spending by the economy, while in the long run they consciously seek to stabilise various macro economic variables. A stable governance is an important indicator of stable macro policies. Hence policy makers insist on the importance of a balanced government that could enhance the role of macro policies in leading the economy upward on its growth path.