Economics Policy and Global Environment: Causes and Solutions

This report examines the multifaceted issue of inflation, focusing on its causes and potential solutions within the global economic landscape. It begins by defining inflation and highlighting its detrimental effects on economic growth, then delves into the factors that contribute to rising prices, including political conflicts, industrial breakdowns, excessive money printing, high demand exceeding supply, imported inflation, exchange rate fluctuations, and increased bank lending. The report also explores the impact of natural calamities, low production levels, and government expenditure on inflation rates. The core of the report outlines two primary policy approaches to combat inflation: monetary and fiscal policies. Monetary policies include open market operations, adjusting bank rates, legal reserve requirements, special deposits, selective credit control, and moral suasion. Fiscal policies involve increasing taxes and reducing government spending. The report concludes by emphasizing the importance of stable governance and the adoption of contractionary monetary policies to mitigate inflation, especially in countries experiencing economic instability. The report references several academic sources to support its analysis.

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Economics Policy and the Global Environment
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Question one (1)
Introduction
Inflation is a situation where the prices of commodities and services within an economy
keep on increasing at a given period. Inflation is one of the world’s greatest problems that
hinders economic growth and development of a given economy. Inflation rate can be of various
types which include, creeping inflation, walking inflation, hyper inflation among others.
Countries suffer from inflation which is majorly caused by a political war, breakdown of
industries, printing of too much money (Nelson, 2018).
Severe political wars among countries are the major causes of inflation in the world.
These wars have led to destruction of industries and death of people causing misery, and loss of
property among people (Morrissy, 2011). This has sparked off a sharp inflation brought about by
high costs of production in the industrial sectors. Furthermore, high demand of goods and
services especially in developing countries of the world that exceeds the available supply causes
inflation. In an economy where the demand for goods by people is high like that of Venezuela,
Angola and South Sudan, the inflation rate is usually high. This is because an excessive demand
for goods and services by the consumers will force the producers and sellers to raise the prices
for these goods and services hence inflation in the economy (Floyd, 2018).
In addition, importation of goods from countries already experiencing inflation is a cause
of inflation in Venezuela. Countries such as India and China where Venezuela imports her
commodities also do have high rates of inflation. This therefore means that Venezuela gets
imported inflation direct from these countries (Morrissy, 2011).

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Furthermore, exchange rates may be a cause of inflation among countries in the world.
Since the commonly used currencies in the world are US dollars and Euros, any fluctuation in
these currencies affects other countries’ currencies (Nelson, 2018). High interest rates usually
attract foreign investors to a country and this increases demand for local currency thus an
increase in the rate of inflation. On the other hand, low interest rates by commercial banks
discourage investment and in turn the demand for local currency reduces causing a deflation
among countries.
Increased printing of money, when central banks print more money, the circulation of
money within countries will be high. This will call for an increase in demand for goods and
services leading to a type of inflation known as demand-pull-inflation. However, reducing the
amount of money printed within the country by the central bank in turn reduces the demand for
good s and services thus curbing inflation in the world. Also, increased bank lending causes
inflation (Floyd, 2018). The rate of inflation becomes high in an economy if the rate of bank
lending increases. This is as a result of increased money supply in the country. People always
tend to borrow more from commercial banks in cases where the interest rates are low. However,
when commercial banks reduce their rate of lending to the public, the inflation rate also
decreases in since few people will be given loans (Bagus, 2014).
Natural calamities, these are unforeseen happenings such as flooding, drought, landslides
among others. Natural calamities may lead to destruction of property and break down of
industries like manufacturing industries and agricultural industry. This leads to a sharp increase
in the cost of production and hence an increase in the prices of goods within the countries which
causes inflation in turn (Specia, M. 2019).

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Also, low levels of production where there is limited production of goods within
countries. Most of the goods are imported from other countries like China, United state of
America, Canada among others. These low levels of production have led to cost push inflation in
the countries and low levels of economic growth (Sherlok, 2017).
In addition to the above, rapid increase in government expenditure where by the
government of Venezuela finances unprofitable ventures such as wars by purchasing bombs,
guns, poisonous fumes among others (Specia 2019). These lead to inflation since the government
is spending without expecting any returns. This is so because there is an increase in money
supply in the country of Venezuela.
Solutions of inflation among the countries in the world
There are two polices which should be improvised by the government to solve curb
inflation. These policies include monetary policy and fiscal policy. Monetary policy is the
immediate government attempt to increase or decrease the amount of money in circulation
through the central bank. Fiscal policy is the one which aims at regulating the number of
activities in the country to acquire the set targets.
Monetary policy (contractionary policy), the monetary policy involves the use of
instruments or tools to reduce the amount of money in the country. And these may include the
following:
Open market operation, this involves the buying and selling of government securities.
These securities include bonds and treasury bills. In order to reduce inflation, the government
should reduce on the supply of money in the country (Blezie, 2019). This can be through selling

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government securities to the public. When the government sells off its securities, people will
remain with less money hence reducing on their bargaining powers for goods and services.
Also, the governments of the countries through their central banks should increase the
level of bank rates at which the commercial banks borrow money. When the bank rates are high,
this reduces the borrowing powers of commercial banks. Commercial banks increase the cost of
borrowing of loans to the people, this helps to reduce the purchasing powers of individuals. Thus
reducing inflation more so the demand-pull inflation.
Furthermore, legal reserve requirement, this involves the amount of money which
remains on commercial banks for daily withdraws. The government through central bank should
increase the legal reserve requirements for the commercial banks. This reduces the lending
powers of commercial banks to the public. This in turn reduces amount of money in circulation,
thus reducing inflation. Besides, special deposits also reduce inflation rate. Special deposit refers
to the amount of money which put over the legal reserve requirement by the commercial banks.
When there is inflation in the country, the government central bank to order commercial banks to
increase on their deposits to be kept on the account. This leaves the commercial banks with less
money to lend to the public, thus reducing inflation in the country.
In addition, selective credit control is also a monetary tool which reduces inflation in the
country. When the government wishes to reduce inflation, it should discriminate in giving out
money among the sectors. The government should give money to the sectors like agriculture and
some sectors which invest the money. When the government puts its funds in agriculture, money
won’t be in circulation in short term. This reduces inflation in the country.

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More so, moral suasion also reduces inflation. This is where central bank reaches out
commercial banks in kind way according to the current situations in the country. In case of
inflation in the economy, the central bank should request commercial banks to reduce their
lending behaviors to the people in the country. This helps in reducing money circulating in the
country.
Fiscal policy involves the government immediate action to regulate the level of activities
in the economy. For the case of a country with inflation like Venezuela, the government should
adopt contractionary measures and these may include, increase in taxes and reduction in the
spending of the government (Labonte, 2011). These measures are explained as below:
Increase in taxes, when the government increases taxes on goods, services and salaries or
wages of the people, this reduces the disposable income of individuals. When the disposable
income of individuals is reduced, their purchasing powers are also reduced (Islam, 2018). When
the income of individuals is reduced through taxing holding the supply level of goods in the
country constant, this will reduce inflation resulting from high demand for goods.
Also, the government should reduce on the level of its spending to the public. The
government spending can be through providing services like, education, health, transportation
among others people. When the government reduces its spending, people will use their own
funds to purchase the services. This will reduce the amount of money in the hands of the people.
This reduces the bargaining powers of the goods and services in the country, thus reducing the
amount of money in circulation.
Conclusion

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Countries in the world have been faced by high rates of inflation. These scenarios of inflation
could have been majorly caused by the increased political wars in the country. The political wars
make people unstable and these wars limit the level of economic activities such as agriculture
and production. This situation increases the demand for goods and services in the country since
the production levels are low. However, the governments of the countries which are experienced
by wars such as South Sudan, Venezuela and Syria can reduce inflation rates in their countries
through adopting the solutions given especially taking the view of contractionary monetary
policy. The governments of the counties with high rates of inflation such as South Sudan,
Nigeria, Angola, Venezuela, Syria and other countries should immediately put stable political
governance so that inflation is curbed. Inflation remains an economic event which hinders
growth and development of economy.

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