Sabyasachi Sahu -1501100 Macroeconomics ssignment-31a. Inflation:Milton Friedman, noted economist said that Inflation is an old, old disease. Weve had thousands of years of experience of it. There is nothing simpler than stopping an inflation- from the technical point of view.Inflation occurs when there is rapid increase in the quantity of money as opposed to its supply. The cause of this has been attributed to many factors like labour unions, spendthrift consumers, greedy businessmen and international forces. However, he establishes that the actual reason of this is a government which has exclusive control over the quantity of money supplied. It can be caused by the government printing more money or creating new deposits on the banks books. Besides, Friedman also says that, post 1970, inflation is a national phenomenon and not an international phenomenon, and doesnt depend on either capitalistic or communistic polices. Cause i. Discovery of Gold: Because the pre-1970 era followed a fixed exchange rate system, any increase in the supply of gold increased the quantity of money, thus increasing inflation. This is why Gold Rush in California and Australia triggered a worldwide inflationii. Fiscal Deficit: The public expects the government to spend money on them, without raising taxes. This increases the fiscal deficit, since spending has increased but source of revenue has stayed the same. Now the Govt. can finance it either by raising taxes or by issuing debt. It cannot raise taxes, since there will be huge political ramifications over it. Hence, it issues debt. But issuing debt is costly and bond financing of debts is hard. The only often left therefore, is to print money, thus increasing the monetary base and causing inflationEffects: i. Employment: It depends on the rate of economic growth. Since inflation affects the rate of economic growth. It effects employment too. However, the Philips curve relation is valid over the short term but not over the long run, i.e the natural rate of unemployment takes over. ii. Income distribution and Wealth: Inflation leads to redistribution of wealth and income because of the factor that reduces the real value of money. Hence, in the case of rising inflation, debtors gain and creditors lose. Salaried workers and fixed income groups lose during inflation. Also, equity holders and investors gain during inflation, since share prices increase and so does the dividend handed out to them. Therefore, it is safe to say that , sections of the society holding large price variable assets gain. This increases their returns on wealth and ability to accumulate more assets. Therefore, wealthy people gain more wealth. The result is redistribution of wealth in favor of rich section of societyiii. Production: When prices start rising production is encouraged. Producers earn wind-fall profits in the future. They invest more in anticipation of higher profits in the future. This tends to increase employment, production and income. But this happens only in the short run. iv. Balance Of Payments: When prices rise more rapidly in the home country, domestic products become dearer, giving rise to increased imports, thus making balance of payments unfavourable, and lowers the exchange rate in relation to foreign currencies.Cure Of inflation:Milton Freidman said through-out this film that the means to stop inflation lies solely in government. And that as government controls the printing of money it has to have the political will to stop spending more than it has.The only cure for inflation is thus to reduce the rate at which total spending is growing. However, this has a temporary side effect where it will involve a temporary increase in unemployment and the rate of production. But these costs, he says will be far less than if inflation remains unchecked.1b. There has been considerable debate on Milton Friedmans view that monetary policy is the most important measure to curb inflation. There has been one view point of increasing the rate of output. This in turn will peg the quantity of money in the market to the rate of output to attain equilibrium, where there will be a marginal increase in inflation. Milton Friedman led the profession away from the weight it gave to fiscal policy. His work was important in forming the consensus that monetary actions have more sizable and reliable effects on aggregate spending than fiscal actionsInflation is caused because the budgetary/fiscal deficit is financed by printing money. This in turn gives rises to seignorage and in turn comes out to tax people in the form of inflation. It essentially means that the fiscal actions of the Govt. is accommodated by the monetary authorities. Fiscal policy which deals with taxation and spending and deficit is significantly different from monetary policy which deals with the quantity of money. That is why the fed should be independent of the Government. Moreover, because of electoral pressures, the deficits that the Government prescribe beforehand are always lesser than the deficit that they achieve. Since, monetary authorities are not subject to this pressure, they are in a better position to control money supply. The primary difficulty faced is that a few developing countries have deep markets in government debt. The matter is further complicated by the difficulties in forecasting fiscal pressure and money demand to levy the inflation tax by rapid expansion of the monetary base. Also inflation can also be checked by moving to a fixed rate exchange system, since quantity of money supplied is pegged to gold in store and thus can be regulated.