Flatio Inflation In The UK Economy

Register to read the introduction… As a result of this, real output will shift from to P to P1. A lack of disposable income will arise from the people who have lost their jobs and will therefore demand less goods and services. Moreover, this can also lead on to the knock on affect of a loss of jobs in other areas of the economy due to there being a deficient demand. The government will then as a result of this increase expenditure as capital expenditure will increase on welfare benefits, which will mean that money cannot be spent on other supply side policies, resulting in a trade of a damaging the long run growth of AS.

In addition to this, public confidence will deteriorate which will also lead to a reduction in AD. With consumers having less confidence, they will be less likely to invest and more likely to save as they will feel as if the economy is unstable and heading towards a recession. Likewise, productivity will fall as employees will be demotivated and feel under the pressure of redundancy and unemployment. This will therefore increase government expenditure and deteriorate the government’s budget. Inflation in the economy will also decrease if currently the UK is operating at full employment. …show more content…
On the above diagram because AD has decreased to AD1 the price level has also decreased to P2. This has therefore reduced inflationary pressure. This is beneficial for the UK economy, because exports will increase due to the average price of goods and services manufactured in the UK decreasing. As a result employment may increase in the private sector as stated in extract C because private sector will invest in capital to increase supply. This is beneficial for the UK economy because the UK’s balance of payments on current account will decrease due to an increase in exports. This is an injection into the circular flow of income and will in the long run increase domestic income, thereby increasing demand. This surplus in the balance of payments in the current account will also lead to an increase in government spending. This is due to the fact that government revenue will increase, to both direct and indirect tax income. As a result of this, government can then spend more money on supply side policies such as investing into things such as education or training schemes. Overall, I believe that cuts in public spending are necessary to reduce inflationary pressure and reduce the government’s budget deficit. This will be beneficial in the long term because private sector will increase investment in capital goods, which is an injection into the circular flow of income and will also lead to a shift of the LRAS to the right. Secondly, the extent to which, if at all, cuts in public spending are unavoidable given the size of the budget deficit, so I feel that the government addressing this through cuts on public expenditure is a positive. Although, I do believe to some that significant cuts in some areas may lead to disruption and there may be some alternates such as increasing taxation and their relative merits. As a result, LRAS will increase to LRAS 1. This is very beneficial as more output will be generated and supplied at the same price level, which will lead to an increase in the welfare of the UK population.