Maintaining Price Stability

Essay by Ri-RiHigh School, 11th gradeB+, May 2009

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Price Stability or low inflation plays a large part in both the economic and social well being of a country. "Inflation is basically described as the general increase in the prices of goods and services in an entire economy over time." (Financial Guide, 2007) Measured by the CPI, price stability has many causes, mainly divided into two categories, Demand-pull, caused by excess demand, and Cost-push resulting from lowering of supply. Price stability is one of the main objectives that the Australian Government tries to achieve using a combination of economic policies.

Managing the economy is an arduous task for any government as the issues and variables surrounding this management are many. Because Government objectives are prioritised according to importance, the government faces a balancing act between conflicting objectives and often the health of one is sacrificed when a contradictory objective is failing. Aiming for low inflation, for example can compromise full employment.

Until recently, price stability was the focus of government policies, however, now the focus has shifted to economic growth and full employment as the Australian economy now in the downturn phase and hopefully prices will lower as a result. No matter what phase of the trade cycle a nation is in, price stability remains an important objective in maintaining confidence in the economy.

Rising inflation is often thought of as a monetary issue, where in fact it has a large social impact on consumers in an economy. A lowering of living standards, cutting back on non-essentials, uncertainty, stress and rising unemployment are just some of the results of not achieving this objective. People end up dipping in to their savings or cash hoarding; where people do not spend money and therefore do not inject it back into the economy, halting economic flow. The overall morale of an economy...