The Sacrifice Ratio
Tight monetary and fiscal policies to reduce inflation may reduce the growth rate of aggregate demand. This reduction can lead to a reduction in production and employment, which is an important cost; reduces the benefit of reducing inflation. This için sacrifice rate ılar is used by economists to calculate this cost. The sacrifice rate is a percentage of how much production will decrease when we lower inflation by one percent. Indeed, each tightening policy to reduce inflation also narrows production.
Countries’ sacrifice rates are different. For example, Australia’s 1, Canada’s 1.5, and the United States has been set at 2.9. These figures are the average of the 1960s and 1980s. The US needs three times more sacrifices than Australia to reduce inflation
The Other Costs of Inflation
Even though there is no imbalance in production, such as inflation, unemployment, which is not removing the wholesale potential level; Unemployment refers to the unused means and the economy moves away from its potential level. However, inflation also has social consequences and individual psychological costs. They also find the source of economic imbalance.
This tension must be greatly reduced if the state has mechanisms to make it possible to indemnify the impoverishment imposed by the resources transferred from the masses to the upper-income groups without interrupting growth.
One of the most important costs of inflation is the transfer of revenue out of the country. As the demand for foreign goods will increase with relatively cheap imports, employment capacity for foreign countries increases. That is, while workers from other countries find a job, unemployment in the country increases. Secondly, the real value of goods and services to continue to export in the national currency devaluation of the loss of internal prices, relative prices to develop against the country and finally, the transfer of resources through the terms of trade is realized.
Stopping High Inflation
The excess demand, which feeds inflation, is due to the borrowing or partial monetization due to the budget deficits, which feeds the excess demand, stopping the rate of stopping or lowering the rate of increase in the prices is also the reason for eliminating the cause. However, the psychological struggle may be necessary to get rid of the habits of inflation and break expectations. Behind all these policies, there must be a strong, safe and democratic power.
The reason for the increase in prices to very high inflation and even hyperinflation is the monetary growth rate and the budget deficits and debt management behind it. When price increases turn to the very high inflation rate, the rate of increase in prices exceeds the rate of increase in money supply. As a result, real currency balances declined rapidly. As a result, even if nothing is done, the hyper-currencies drop the rate of increase in money supply so that real currency balances fall off spontaneously. The policy of reducing inflation is to try to prevent the social destruction caused by the time.