Sample Business Studies Coursework Paper on Inflation

How much has the value of the home changed based on the CPI calculator?

Inflation refers to the general fall in the purchasing power of money coupled with a general rise in prices of goods and services. It is sometimes referred to as the time value of money; since one dollar today is worth more than the same amount in the future. It is impossible to have an inflation value of zero though the rate can be controlled by various relevant monetary and fiscal policies. Per the example from the Inflation Calculator, a house worth $100,000.00 in the year 2000 would cost $145,497.10 in the year 2018. This represents a rise in price equivalent to 45.5%. It can, therefore, be summarized that general prices in the United States rose by 45.5% from the year 2000 to the year 2018. This represents an average annual inflation rate of 2.52%. Assuming this rate remains constant in the forthcoming years then the purchasing power of a dollar will fall by this margin as prices rise by the same margin.

Why does inflation encourage businesses and households to hold physical assets like homes, buildings, and equipment?

Per economic theorists, tangible assets act as hedgers against inflation. It is, therefore, advisable to hold tangible assets over cash and its equivalents when anticipating inflation rises. The reason being inflation tends to raise the prices of tangible assets while lowering the purchasing power of cash. A rise in inflation leads to a revaluation of tangible assets based on the new rates of interest and weighted cost of capital. These rates tend to rise in tandem with inflation and as such lead to high values foe tangible assets. However, inflation only changes the real value of money while the nominal or face value remains the same. As such the purchasing power of the money diminishes.         

Week 8 | Discussion Question 2

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“Aggregate Demand and Supply”

Use aggregate demand and aggregate supply to explain why current oil prices are so low. It is certainly good for consumers, but is there a downside as well?

The law of supply and demand states that an increase in price will lead to an increase in supply and a decrease in demand respectively. This holds for all normal goods. Oil is a very crucial commodity whose supply affects the prevailing market prices. The oil shock described above occurred after the OPEC met and declared an embargo on all countries perceived to be aiding Israel in the 1973 Arab-Israeli War. The embargo meant a sharp decline in the supply of oil into the global markets while demand remained constant. The resultant effect of this is a shift in supply to the left. The equilibrium quantity reduces while the equilibrium price rises. As such a small quantity ends up selling at a higher price. During the 1973 oil supply shock a barrel of oil was selling at $12. Before this incidence, the same barrel was selling at $3 globally. This represents a good example of an unfavorable oil shock that only benefits the producers.

When oil prices drop, who benefits and who loses? Why? How?

On the flip side, economic circumstances can also lead to a positive oil shock. This occurs when suppliers increase supply past the equilibrium quantity. This sharp increase in supply shifts the aggregate supply curve to the right resulting in a decrease in prices. A positive oil shock can also be caused by many sellers entering the market and dealing in the same commodity. Ease of availability of the product pushes its prices down. The global oil market is currently flooded with a significant number of sellers with new entrants such as India also joining. The increased supply translates into low prices for consumers, who are the biggest beneficiaries. However, the low prices mean reduced profits for already established companies. This could necessitate a decrease in expenses achieved through several ways such as restructuring. Restructuring could lead to the laying down of several workers.

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Week 9 | Discussion Question 3

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“Fiscal Policy”

Read CNBC’s Consumer confidence strengthens in July, beating expectations for a drop

  • Who is in charge of making fiscal policy?

Fiscal policy refers to the corrective measures adopted by a government in an effort to monitor its spending and tax rates so as to achieve a required economic objective. A government wanting to spur aggregate demand, for instance, may increase its spending and reduce taxes so as to increase the level of disposable income. This is the part of income that is used in consumption. To counter inflation, the government may do the opposite of the above: decrease its spending and raise taxes. The government is, therefore, the sole body in charge of making fiscal policy.    

  • What fiscal policy measure has a direct impact to the economy?

Fiscal policy measures are aimed at affecting the macro economy of a country. The tax policy measure, however, has a direct impact on the economy since it affects personal incomes and consumption directly. Higher taxes mean a consumer will have to forego either some consumption or saving. Low savings mean low investment levels. Unlike, changes in government spending, tax regulations bear a direct effect on the economy.   

  • If consumer confidence is low, which of the following will be the most effective fiscal policy?
    • An increase in government spending, or
    • An equal decrease in taxes?

Explain your reasoning.

A low consumer confidence is an economic indicator used to measure the level of optimism that consumers have concerning the economy holistically and their individual financial situations. A high consumer confidence would mean that the economy is booming and consumers are finding it easy to make money. A low consumer confidence would mean the direct opposite of this. A low consumer confidence would be better handled using an expansionary fiscal policy. This could be an increase in government spending. This would increase aggregate demand leading to the creation of more jobs. Availability of jobs means an increase in per capita income since people with no incomes are now earning. This will increase consumer confidence.

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