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Economics

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Economics

Inflation as an economic problem can be reduced through the control of external

inflationary forces acting on the economy, including interest rates, value for money and

depreciation of assets such as the level of control, which can be regulated through stringent

regulations and policies. World economies experience similar economic problems and

challenges, although significant differences may be identified between developed nations and

Third World countries. The ultimate goal of economies is to achieve a state of stability. Major

economic development indicators encompass purchasing power of the currency, gross domestic

product, GDP at purchasing power parity, levels of absolute poverty, malnutrition rates, access to

safe water, literacy rates, openness to international trade, quality of infrastructure, and political

stability. Macro-economic problems include such challenges as recession, inflation, the volatility

of exchange rates, and current account deficits (Brown & Burrows, 2017; Vovchenko et al.,

2016). Each of these problems has been researched to a different extent by experts in the

industry, and several solutions have been proposed over the years. However, countries,

continents and individuals still suffer from the impacts of inflation majorly because they do not

implement scholarly recommendations while the problems keep taking on new shapes that

presents the need for adaptive response mechanisms.

The Problem

Developed and developing countries have experienced varying inflation rates in the

recent past. In the meantine, the prices of essential commodities have increased rapidly, and the

consumer price index has become volatile. Inflation has been most rampant in the Third World

as the value for money in such states has deteriorated dramatically. Inflation has been a reason

for concern in many nations worldwide for a very long time. Despite the spirited struggle that
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governments and supporting establishments such as the World Bank have introduced to curb on

inflation, the problem persists and continues spreading across nations and societies. Inflation

needs to be controlled, and economies should adopt strategies to deflate their economies as this

issue cripples the capacity of consumers to purchase and inherently crushes the ability of

producers to sell.

In order to identify the concept of inflation, the Google search engine was used to seek

the keywords, namely "major economic problems affecting the world". The results indicated that

most economies suffer from global warming, global inequality, widespread poverty, unequal

economic development, depletion of the environment, and inadequate regulation of financial

markets. Each of these issues was then researched individually to understand how they impact

and qualify to be termed as economic problems. The study of these matters revealed that they all

have some underlying aspects of inflation and reduction in the value of resources, including the

capital. It was noted that most commodities have had their cost increased perpetually over the

last few years. The increment is always accompanied by the changes in exchange rates and

interest rates in the banking sector. Further research and recent news articles provided that

inflation is spreading rapidly thereby affecting all domains of the economy as time passes (The

Economic Times, 2020; BBC News, 2020). According to prior knowledge, increasing interest

rates, escalating costs of essential commodities and reduced value of money are the key

indicators of inflation; hence, based on frequency in the media coverage, inflation is an issue

worth researching as it seems to be the underlying factor behind most challenges in the global

economy.
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Economic Options

The solution to the problem of inflation lies in strategic planning by actors in the

economy aimed at reducing the inflation forces. Some countries, especially in the developed

world, have established particular infrastructure meant to curb inflation. The following

possibilities have been revealed from a brief brainstorming exercise that involved listing any

potential measures against inflation in layman's terms.

 Implementation of regulatory monetary policies.

 Control of the supply for money.

 Governmental fiscal policies.

 Regulation of wages.

 Supply-side policies.

Some contributors to inflation are more personal than economy-based. The possible

solutions to personal problems are as follows:

 Encouragement of investments.

 Storage of money in assets rather than banks.

 Creation of alternative income generation channels.

The potential solutions can be combined into three major economic options for

combatting inflation. Nevertheless, some strategies will eliminate the impact of inflation on

organizations and individuals rather than reduce inflation. The three options include:

1. Implementation of governmental regulation policies.

2. Promotion of revenue generation.

3. Control of supply-side policies and wages.

Economic Option 1: Implementation of Governmental Regulation Policies

The government has control over the amount of money to be printed and released into the

national economy. The authorities also govern economic aspects such as value added tax and

other factors that influence the country's interest rates. Printing of money can cause inflation

since it increases the supply of money without reciprocating the same in the supply of goods

(Murphy, 2020). Hence, more money is available for purchasing a unit measure of goods;

consequently, producers will charge more for their products. This outcome directly leads to

inflation as each item is purchased at a value higher than necessary. In the most straightforward

language, there is more money available to purchase the same volume of goods. If the

government develops a policy that reduces the amount of money printed in every fiscal period,

the present money will have higher value since more products can be procured. Such a strategy

can also be implemented by expanding the scope of goods (regulation of the amount of money

and the volume of products available). The cost of investment in this scenario will be the sum of

money that the government incurs in increasing production in the national economy. Meanwhile,

the return in investment will be the amount saved by not printing money and the improved value

of money.
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Percentage inflation is the percentage change in the average prices of goods.

In this case, percentage inflation = 20-10/10 x 100 = 100%

The regulation of fiscal policy such as value added tax could also contribute to the

reduction of inflation. Governments can cut spending by increasing taxes. The given approach

will enhance budgeting and lower demand in the economy. By implementing this policy, the

government will be regulating demand-pulled inflation. In some cases, inflation is prompted by

the high demand that gives producers the leeway to raise prices without losing sales. In the

conditions of rapid growth, any policy that minimizes the aggregate demand can reduce the

forces that cause inflation and subsequently decrease the inflation rates (Chan et al., 2017).

However, this strategy diminishes national output and promotes unemployment. Thus, the cost of

investment is the cost of VAT that consumers will pay when doing a purchase. The return in

investment will replicate the amount of losses that will be curbed due to this measure.
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Other factors that the government can regulate to deal with inflation include interest rates

in the credit sector, the base price of commodities, the cost of doing business among other

parameters that will keep the cost of goods lower.

Economic Option 2: Promotion of Revenue Generation

The creation of earning power and equipment of the economy with productivity for the

community can maintain the forces of inflation low hence reducing inflation rates. When

inflation rises, the money stored in banks and commercial entities in liquid form loses value at

the individual and corporate levels. Still, money held in terms of assets or tangible resources

does not decrease in value as these items can remain at some standardized appreciation rates (Ha

et al., 2019; Pettinger, 2020). It is essential to note that it is investments rather than savings that

drive the economy. Promotion of revenue generation involves the exploitation of resources for

revenue, the improvement of minimum wage levels, and opening up of the economy for foreign

investments. The facilitation of revenue generation is a strategic approach undertaken by

governments to increase the circulation of money within the economy, which allows for the

limited money supply to change hands frequently and buy more products. With a greater

circulation, the economy does not need to inject or print more money, and the fluctuation in the

prices of commodities will be minimal. When no more money is left to be embedded into the

economy through printing, the value of a unit of money remains relatively constant, while

preserving the value of money protects against inflation. The same amount of money would

suffice to purchase a similar number of products. Inflation is further prompted by the national

debt as governments increase VAT to collect revenue for debt reimbursement. When the

government is largely involved in revenue generation, the prices of essential commodities will

not be raised to cater to the national debt. In this way, the value for money will stay constant

thereby successfully curbing inflation. Greater circulation of money and revenue generation will

result in a stable economy through the inbuilt reduction of inflationary forces and factors.

Economic Option 3: Supply-Side Policies

Supply-side policies in terms of both money and production can significantly cut

inflation. Sometimes inflation is caused by the absence of strong competitive forces in the

market. Competition helps regulate the cost offering for goods circulating in the market. Supply-

side policies make it easy for the rival entities to enter the business hence enabling the economy

to become more responsive and keep inflationary pressures in check (Wang, 2019). As a result,

supply-side policies facilitate the establishment of businesses in the economy with more

producers increasing the number of products available in the market. The presence of variety

provides options and bargaining power to the consumers, which is harnessed to keep the prices

of commodities at a reasonably low monetary cost. Supply-side policies can be categorized into

two formats; one of the approaches is to promote the penetration of products into the economy
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that can be done by encouraging the creation of businesses and new investments. Opening up the

economy shall allow for the availability of more goods for the same amount of money; hence,

money may rise in value. Under the same supply-side policies approach, the regulation can cut or

reduce the supply of money thereby increasing money supply. In this regard, supply-side policies

can be used to manage the volume of money and products, keep in check the value for money

and control inflation as a consequence.

Discussion

The governmental regulation can serve the interests of either of the three economic

options for curbing inflation. The three strategies can be effectively executed by expanding the

scope of the first options. Supply-side policies can be successfully introduced through the

establishment of governmental regulatory policies. The authorities can also use policies to

manage investments and earning power of the citizens across all sectors. The implementation of

governmental regulatory policy is, therefore, the most optimal economic approach for

minimizing inflation. The given option is the best because it offers a channel through which

governments can rule over all sectors of the economy and their operation in terms of financial

positions. Such policies may include:

 Setting inflation targets.

 Minimizing the amount of money printed.

 Promoting the volume of production.

 Encouraging investments.

 Regulation of interest rates.

 Control of wages.

 Management of supply systems.

By regulating all these areas, the government will control all factors that contribute to

inflation. As such, the best solution in the combat against inflation is the effective governmental

regulation. The establishment of inflation targets will inform the government when inflation is

out of hand, warrant investigation in the cause and consequently inform on corrective actions.

The policy that minimizes printing of money in the market ensures that the value of money

remains constant, considering the products competing for the same sum. Promotion of

productivity improves the value of money by availing more goods to the given amount of money.

At the same time, the regulation of interest rates controls the price of basic commodities and

keeps the cost of living reasonably low. A carefully designed policy can touch on all inflation

forces and curb the promoters of inflation at their roots; hence, an effective policy can be

conducive to a significant reverse of inflation.

Conclusion

As a major economic problem inflation can be curbed through stringent regulations and

control of inflationary forces. The introduction of relevant policies can apply to all fronts of

inflationary factors. Regulation via policy is an efficient approach in managing and majorly

avoiding inflation in the national economy. An adequate level of inflation is an indicator of a

healthy economy. Inflation only becomes a menace when it spirals out of control and results in

unrealistic increases in living costs. Inflation can be suppressed through the implementation and

regulation of effective economic policies. Some strategies are more suitable for reducing

inflation, while others work best towards mitigating its root causes. Governmental regulation can

attain both goals, and it is, therefore, the best solution to the problem of inflation.
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References

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Brown, A. J., & Burrows, E. M. (2017). Regional economic problems: Comparative experiences

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Chan, S.-G., Ramly, Z., & Karim, M. Z. A. (2017). Government spending efficiency on

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Ha, J., Kose, M. A., & Ohnsorge, F. (2019). Inflation in emerging and developing economies:

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