1. Choose two countries on the graph below and give a plausible explanation for
ID: 1107338 • Letter: 1
Question
1. Choose two countries on the graph below and give a plausible explanation for why they either fall above or below the black 45 degree line coming out of the origin. You can use the quantity theory to provide the explanation or it could be something, even outside economics, that is not accounted for by the quantity theory. Your explanation should involve one average-sized paragraph for each country and any necessary references. Inflation rate 90 80 70 60 50 (percent) Democratic Republic of Congo 40 30 20 elarus 10 China, Mainland 10 10 20 30 40 50 70 Money supply growth (percent)Explanation / Answer
China -
China is one of the largest economy in the world and it has grown tremendously in the last three decades. It is usually observed that if an economy is growing then it experiences consumption and that stokes inflation higher because ideally inflow of money should be circulated in the economy as increased wages.
However, this is not the case with China which until had $4 trillion foreign currency reserve. China artificially keeps it currency low to boost exports and it doesn't allow wages to raise thus curbing consumption. Recent weak global economy is also the reason for as Chinese economy is driven by exports rather domestic consumption. It could be much higher given its huge population.
Switzerland -
There is an empirical and logical relation between population and inflation. As population increases, it creates demand for more resources and it tends to be limited so it creates inflation. Moderate inflation is good for economy because deflation tends to be disastrous. Switzerland is a developed country and it is having higher living standards and also very low population growth. In fact, population of Switzerland has not grown in last two decades and there is actually negative growth which means there are little chances that Switzerland will witness inflation.
It has brought interest rates in negative to boost consumption which indicates the whole picture.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.