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Monetary Policy - Inflation - CausesFurther workIn this section we look at a few other areas of economic theory that you may want to consider when studying the causes of inflation. Expectations - economists differ a lot over the assumptions they make about the nature of people's expectations. The views range from the 'rational expectations' school of economists to 'extreme Keynesians'. It is also important to have low and stable price expectations as a key part of a regime of price stability. GDP in real terms - to work out national income in real terms, statisticians use a measure of inflation called the GDP deflator. This differs slightly from the RPI, though the RPI can be used to work out GDP at 'constant prices'. The velocity of circulation - one of the key assumptions of the quantity theory of money is that the velocity of circulation of money is stable. However, it is far from clear if this is true. Classical economists argue that it is, but Keynesians that it isn't! What does the evidence show us? |
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