Management Notes

Reference Notes for Management

Government may pursue inflationary monetary policies

Government may pursue inflationary monetary policies

    1. To promote high employment
    2. To accommodate demands of workers for higher wages
    3. To finance a persistent budget deficit
    4. All of the above

Correct Answer: All of the above

 Answer Explanation

With the goal of achieving multiple economic objectives, governments may decide to implement inflationary monetary policies. It is correct to choose option (d), “All of the above,” since it identifies a number of reasons for pursuing inflationary monetary policies. Here are some of these reasons:

To promote high employment:

A high level of employment can be promoted by inflationary monetary policies, often associated with expansionary monetary measures. To stimulate borrowing, spending, and investment, central banks increase the money supply and lower interest rates. Economic activity increases demand for goods and services, which, in turn, can result in a greater demand for labor. As businesses expand and production ramps up, unemployment rates can decline, resulting in higher employment rates.

To accommodate demands of workers for higher wages:

Inflationary policies can be used to accommodate workers’ demands for higher wages. When wages rise, workers experience an increase in their purchasing power. In order to prevent real incomes from declining because of rising prices, governments may allow moderate inflation. Inflation erodes the real value of debt effectively and allows for nominal wage increases without necessitating corresponding increases in labor productivity. Maintaining a balance between wage demands and overall price levels can be achieved through this method.

To finance a persistent budget deficit:

In order to finance a persistent budget deficit, governments may opt for inflationary policies. When the government faces a budget deficit (expenses exceed revenues), it can choose to monetize the deficit by creating new money. By using this method, the money supply in the economy is increased effectively.

In the short run, this approach can help cover budget shortfalls, but it can also contribute to inflationary pressures if the money supply grows faster than economic growth.

Why the other options are not correct

a. To promote high employment:

Although inflationary monetary policies are effective at promoting high employment, they don’t capture everything that is involved. Besides inflationary policies, structural reforms and fiscal policies also influence employment levels. Inflationary policies alone may not be sufficient to solve complex employment issues.

b. To accommodate demands of workers for higher wages

Workers’ wage demands can be accommodated to a limited extent by inflationary policies, but it is not the only way to deal with wage pressures. Moreover, unchecked inflation can decrease purchasing power and potentially lead to economic instability, so price stability and wage growth must be balanced.

c. To finance a persistent budget deficit

The purpose of inflationary measures is not just to finance a persistent budget deficit; however, financing a budget deficit through money creation is an inflationary policy. Inflationary policies can serve multiple purposes beyond deficit financing, such as addressing employment concerns and supporting economic growth.

Conclusion

Governments may pursue inflationary monetary policies in order to promote high employment, accommodate workers’ wage demands, and finance persistent budget deficits. It is true that these policies can yield benefits, but there are also risks associated with them, including higher inflation and economic instability.

Keeping inflationary policies in balance with employment growth, sustainable fiscal management, and price stability is crucial so that inflationary policies contribute positively to a country’s overall economic health.

Demand-pull inflation arises when

Bibisha Shiwakoti

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