5) In the period 2000-2003, the RGDP (real GDP adjusted for inflation) growth ra

Question

5) In the period 2000-2003, the RGDP (real GDP adjusted for inflation) growth rate in the US averaged 2.39% per year, while inflation rates remained at around 2.53% per year. In the latter half of the 1970's, by contrast, inflation rates accelerated markedly even though annual growth in RGDP did not exceed 3%.

Now in 2012-2013, the US economy is slowly recovering from the great recession, what will determine whether it can recover in the coming years a strong growth performance similar to 2003-2006 without triggering a noticeable acceleration of inflation?

Explanation / Answer

nflation is the overall level of prices. In order to understand what will determine whether the US economy can recover in the coming years without triggering a noticeable acceleration of inflation, we need to under what will cause an acceleration of inflation. When unemployment falls to low levels, there is a risk that wage and price inflation will pick up. The demand for labor is increasing and labor shortages in many industries and occupations may arise. This puts upward pressure on pay as employers offer higher pay both to recruit and retain their key workers. There are many causes for inflation, depending on a number of factors. For example, inflation can happen when governments print an excess of money to deal with a crisis

. As a result, prices end up rising at an extremely high rate to keep up with the currency surplus. Inflation can also be caused by international lending and national debts. As nations borrow money, they have to deal with interests, which in the end cause prices to rise as a way of keeping up with their debts. A deep drop of the exchange rate can also result in inflation, as governments will have to deal with differences in the import or export level.

This is a major factor to what will determine whether it can recover from the great recession. Finally, inflation can be caused by federal taxes put on consumer products such as cigarettes or fuel. As the taxes rise, suppliers often pass on the burden to the consumer; unfortunately once prices have increased, they rarely go back, even if the taxes are later reduced. Wars are often another cause for inflation, as governments must both recoup the money spent and repay the funds borrowed. In order to recover from the great recession without triggering a noticeable acceleration of inflation the government needs to be careful about the amount of money printed, money borrowed, and taxes.

During Recessions, not only are more people unemployed, but those who are employed have shorter workweeks, as more workers have to accept part time jobs, and fewer workers have the opportunity to work overtime. When recessions end and the economy enters a boom, these effects work in reverse, incomes rise, unemployment falls, and workweeks expand.

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