Theoretical exposition on the relationship between inflation and economic growth (output)
Theoretical exposition on the relationship between inflation and economic growth (output): Inflation is a misunderstood or confusing concept that has primarily been explained through its effects rather than its causes. For instance, the most used definition of inflation is a continued rise in prices of goods in the economy. As such, it is detrimental that the causes of inflation be evaluated and understood. There are three primary causes of inflation; demand-pull cost push and monetary expansion.
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The most exemplified criticism of the theories of inflation is that they include too many assumptions. In the classical growth theory, there is little explanation on the conditional convergence and the assumption the capital has a diminishing return. As such the theory does not clearly distinguish income divergence between developed and developing economies.
In the Keynesian theory, the underlying argument is that; government intervenes with the intention of stabilizing the economic cycles thought the expansionary and contractionary measures. However, the theory fails to address issues related to the crowding out effects, its hardship on predicting the output gap, and giving guidance on means to reduce government spending after inflation thus it leads to high taxes (Tucker, 2010).
Perotti, R., 2008. In Search of the Transmission Mechanism of Fiscal Policy: NBER Working Papers 13143, Washington DC: National Bureau of Economic
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