The Bank of Enlgand's M.P.C. Has Allowed the C.P.I. Inflation Rate to Coursework

The Bank of Enlgand's M.P.C. Has Allowed the C.P.I. Inflation Rate to Stay above its 2% Target for More than Two Years - Coursework Example Aggregate demand is said to be the total demand of the Gross Domestic Product (GDP) of an economy and its components are the consumption (C), investment (I), government expenditure (G), and net exports (X-M) which is the imports subtracted from exports (Investopedia, n.d.). Along with aggregate demand, there is the aggregate supply which is the total supply of the Gross Domestic Product and it is the total of the goods and services produced in the economy. The diagram on the right shows the aggregate demand and aggregate supply curve which help to signify the inflation rates and the GDP in the economy. Inflation rates are calculated by different measures which are namely the Consumer Price Index (CPI), Retail Price Index (RPI), and RPIX. Consumer Price Index (CPI) is used to measure the price level of the consumer goods and services in the economy. Retail Price Index (RPI) is the measure of inflation by measuring the change in the prices of retail goods and services. RPIX is a measur e which is dominantly used in the United Kingdom and it is the RPI excluding mortgage interest payments. The Bank of England has set a target of an inflation rate of 2% which is considered to be ideal given the circumstances of the UK economy. The inflation rate of 2% is low and very much constant which means that there is stability in the economy. The UK also has set the golden rule which is that the government will only borrow the money in order to invest and not to fulfill the current spending in the economy. This means that the economy will not be leveraged to a greater level to cover the expenses, and money will be borrowed to generate future revenues. The Bank of England works to keep the economy stable and head towards progress, with the help of its fiscal and monetary policies. The Bank of England aims to keep the inflation rates at low and constant level which generates investor and consumers’ confidence and it will help to develop the economy in the present as well as in the future. The figure on the right shows a business cycle which represents the points which can be experienced by an economy, both good and bad. The peak is the point when the economy is doing its best and economic growth rates are high. At this point, the unemployment rates are on a low but the inflation rates may be high. During the recessionary period, the economy is experiencing lower economic growth and unemployment starts to rise but inflation may or may not be decreasing. The time of trough or slump is when the economy is at its worst in that time and such economy usually faces high unemployment rates and low inflation rates. However once again, the inflation rates may or may not be decreasing as it depends on several other factors too. Inflation can be of two types according to their predictability, which are the anticipated and unanticipated inflation. Anticipated Inflation: Inflation is said to be anticipated when it can be accurately predicted and that it is forese en to be at a specific level in a financial period. Since this inflation is calculated and known, people can protect themselves from its impact. An example of anticipated inflation is when a labor union collectively bargains for a rise in their wages because they have anticipated the inflation rat