I agree that the government should play an active role in managing an inflationary economy. Buck (2011), stated that “The overwhelming majority of economists around the world believe it is appropriate for the government to take actions to promote economic growth and maintain low unemployment and low inflation. ” Parkin (2012: 522) described inflation as “a persistently rising price level” and price level as “the average level of prices, and the value of money”. A price increase would cause people to buy less, and a decrease in demand for products would cause prices to fall.
Parkin (2012) said that expected inflation is promoting a healthy and a strong economy. However, if the burst of inflation is unanticipated, it brings big problems and risks. Employees are worse off because their earned income to get less than before due to price hike. Conversely, employers receive higher profits and better return on their investment, which leads to an increase in investment, production boom and real GDP rises with lower unemployment rate. However, this situation is temporary, spending cools and investment drops, following a fall in GDP and rising unemployment rate.
Unexpected inflation redistributes wealth between borrowers and lenders. The borrower pays the fix rate loan with lesser dollars and brings an impact to lenders such as banks and other financial institutions. In summary, we can not wait macroeconomic to correct itself and the government should take measures to control inflation, ease economic uncertainty and restore economic stability. In fact, most governments use both monetary and fiscal policy to maintain the currency stability and inflation and unemployment at a balanced growth.
US Department of States (2009a), stated that during the 1930s the great depression period, US economy is severely impacted by weak global & domestic economic growth and high unemployment rate. When the situation was getting even worse, the US government responded with taking fiscal measures, such as a tax cut and an increase in government expenditure. As a result, it caused expansion in money supply, consumer willing to spend more and eventually creating more employment and output. Soon the Congress passed the Employment Act of 1946.
Parkin (2012: 729) noted that “The Employment Act of 1946 recognized a role for government actions to keep unemployment low, the economy expanding, and inflation in check”. Advameg (2012), also stated that during the 1970s, US economy entered into a recession, and key issues were energy shortage mixed with a high demand of job & house, rising consumer price, bad credibility and a burst of inflation. As a result, the government did a large interest rate cut to control price inflation to promote both price stability and full employment, which is directed by the central bank. US Department of States, 2009b) Parkin (2012) also noted that in response to the global recession of 2008-2009, the US government took extraordinary measures in order to ease finance crisis. Besides cutting interest rate significantly to keep money flow, the US government also used open market operation to lower bank holding of security and increase their reserves. Extend deposit insurance coverage to increase both deposit and reserves.
MAS (2012a), stated that the current exchange rate policy is assessed to be appropriate in restraining the rising of inflationary pressures, which focus on keeping a stable Singapore dollar to promote the growth on investment and exports and build up a conductive business environment. On the other hand, MAS (2012b) would keep government spending at a low rate and balance the budget. MAS will continue to be vigilant in monitoring and assessing external developments to reduce the impact from Eurozone crisis and keep Singapore economy towards a sustainable growth.
According to the above facts, it shows that the government plays an vital role in governing and overseeing open market to maintain economic stability and growth. The government takes measures in a short or long run to ensure a stable currency, enforce property rights, foster credibility, attract investment and promote a healthy environment through sound monetary and fiscal policy. A credible & reliable government would lead the country towards a sound economic growth, provide the best opportunity to individuals and firms to grow their profits as well as to achieve national investment & growth objectives and goal.
Especially in current uncertain economic environment, the government should act more active to minimise the impact of Eurozone crisis and economic turndown to both consumers and firms and help the economy recovery. It will be a disaster if the government takes no action to control the economic risks. In conclusion, I agreed that the government should play an active role in managing an inflationary economy, keep a close watch on change on the economy and trends, response with an adequate policy to strengthen the business environment, maintain the stability of currency, and develop a sound and sustainable economy.