In the early days of monetary policy, money supply targeting was a core element of anti-inflation policy. This approach was slowly dropped during the 1990s, but the underlying growth of the money supply has remained an important issue for policy makers and recent growth in the money supply has led to concern from some commentators that higher inflationary pressures may yet emerge.
King sees money growth as danger sign Times Online (3/5/07)
Bank’s inflation controllers leave the NICE decade to enter the not-so-nice Guardian (3/5/07)
Should letter-writing be a thing of the past? Times Online (30/4/07)
Questions |
| 1. |
Explain the relationship between money supply growth and inflation. |
| 2. |
What were the main factors that led to money supply targeting being dropped as a core element of monetary policy? |
| 3. |
Assess the extent to which the MPC should pay more attention to the level of money supply growth. |
| 4. |
Should letter-writing be a thing of the past? |
Hyperinflation in Zimbabwe is no longer news. Indeed the news below that inflation has risen to 2,200% may not even surprise us any more. However, inflation of this level should also mean similar changes in the exchange rate if purchasing power parity is to be maintained. The official exchange rate in Zimbabwe, however, hasn’t changed by anywhere near this amount and there are reports (See Scotsman article below) that the Governor of the Central Bank has even tried to portray a recent devaluation as not really a devaluation at all!
Our mutual friend The Economist (subscription) (12/4/07)
Zimbabwe inflation reaches 2,200% BBC News Online (26/4/07)
Zimbabwe’s inflation rate surges to 231,000,000% Guardian (9/10/08)
A month ago, the hospitals were overflowing. Now they lie empty Guardian (6/12/08)
Hyperinflation in Zimbabwe Wikipedia
(27/4/07)
How Zimbabwe lost control of inflation Newzimbabwe.com (11/12/09)
Questions
| 1. |
Explain, using diagrams as appropriate, how hyperinflation will affect the exchange rate in Zimbabwe. |
| 2. |
Discuss the likely economic impact of not devaluing the official exchange rate in line with the level of inflation in Zimbabwe. |
| 3. |
Assess possible exchange rate policies that would help reduce the level of hyperinflation in Zimbabwe. |
As part of its Target 2.0 competition for students, The Times published a series of briefings looking at the factors that cause inflation. The one linked below considers the role of labour markets in determining inflation.
Interplay of work and inflation rate Times Online (2/2/07)
Questions
| 1. |
Explain the key determinants of the equilibrium level of wages in the labour market. |
| 2. |
Assess the role of equilibrium labour market wages in the determination of the level of inflation. |
| 3. |
Discuss the extent to which the NAIRU is still a relevant theory when considering the determinants of inflation. |