STA 307: MACROECONOMICS GROUP WORK

GROUP MEMBERS
1. I63/4236/2019
2. I63/4613/2020
3. I63/4624/2020
4. I63/4951/2020
5. I63/5658/2019
6. I63/4256/2019

(a) Explain the main types of inflation that exist in your country.
 Demand-pull Inflation
It occurs when the demand for goods or services, such as flour, beans,
charcoal, transport and others is higher when compared to the production
capacity.
During the COVID-19 pandemic, Kenyans were driven to panic buying
and stocking of essential supplies such as food in anticipation of what
would happen following the confirmation of the first COVID-19 patient
in the country.
The growth in aggregate demand resulted in a reduced availability of
these goods causing higher prices hence the slight increase in the
inflation rate.
 Cost-push Inflation.
Inflation in the Kenyan economy may arise from the overall increase in
the cost of production. This type of inflation is known as cost-push
inflation.
The depreciation of the Kenyan currency rate can also cause cost-push
inflation as it leads to an increase in the prices of imported goods such as
raw materials for production. In return, producers transfer this growth in
prices to consumers, which results in inflation.

 Built-in Inflation
Expectation of future inflations results in Built-in Inflation.
This occurs when workers recognize that their wages are not keeping up
with inflation rates.
Workers will demand higher wages from their employers to keep up
with inflation. Workers' purchasing power will not decrease if there is an
increase in wages with inflation.
When this occurs, firms will increase their prices as a result of increased
wages, causing the prices of goods to increase in the economy. This
cycle will continue and cause inflation.
For example when Kenyan teachers demand a pay increase in order to
keep up with the inflation rates, Kenyan schools are forced to increase
school fees. This cycle continues even in the Kenyan health sector.

(b). Explore the meaning of the following;

(I) Inflation targeting:

Inflation targeting is a monetary policy strategy used by central

banks to achieve and maintain a target rate of inflation. The

central bank uses various tools, such as setting interest rates and

adjusting the money supply, to influence the economy and achieve

 the target inflation rate. The goal is to stabilize prices, promote

economic growth, and maintain a stable currency.

(II) Expectation:

Expectation refers to the belief or prediction about what will

happen in the future. It can be based on past experience,

knowledge, or other factors. Expectations can play a significant

role in economic decision making, as people and businesses often

base their actions on what they expect to happen in the future.

(III) Credibility:

Credibility refers to the trust and confidence that people have in a

particular institution, person, or statement. In the context of

economic policy, credibility refers to the belief that a central bank

or government will follow through on their stated policies and

goals. A central bank with a high level of credibility is more likely

to be successful in achieving its monetary policy goals, as people

and businesses will have confidence in the bank's ability to control

inflation and stabilize the economy.

c) Account for the escalating food prices in the country.

a) The COVID Pandemic

The current rising prices of food in Kenya was hugely contributed by the
health measures ,such as curfews and lockdown leading to slow
production and distribution of food stuffs hence leading to shortages and
hence increased prices for current food in the country

b) The Russian invasion of Ukraine is expected to add to the pressure

since Russia accounts for almost a third of wheat imports, making it the
country's lead supplier. Ukraine accounts for 94 per cent of the soya
imports, and because of the invasion, the food prices of wheat and Soya
went up

c) The rising input cost of Production

Kenya imports most of raw materials for animal feeds manufacturing,
the raw materials have currently gone up contributing to the rising prices
of animal feeds currently

(d) Suggest the possible policy measures that can be used to stabilize
food prices in your country

1) Price Adjustment Schemes

In this policy target stabilization prices are established and publicly
announced. When market prices fall below target prices, producers
receive a subsidy equal to the difference between actual prices and
target. When prices are higher than the target per unit tax is imposed on
sales. Subsidies would be drawn from a buffer fund and taxes would
replenish the fund.

2) Appraisal
Subsidized private storage is the most effective way to stabilize market
prices, for a given government expenditures
For a given dead weight loss, a program of direct payment is the most
effective stabilizer of the effective farm price. Four programs aid in
stabilization of prices; Deficiency payment, buffer stock schemes, buffer
fund schemes and subsidy for private storage of commodities. The
program that involve an initial field up of stock increases producers and
hunt consumers.

3) Deficiency payment
The government is responsible for making up the difference between
market clearing prices and those prices guaranteed to farmers, storage,
handling and disposal problems are eliminated
Consumer benefit from increased supplies of commodities and lower
market prices

4) "Product flow" prices stabilization schemes

Buffer stock schemes are most common for storable non-perishable
products. They are designed to store a portion of commodity in years of
large production and low prices and then releasing stocks in years of
high pricing. A buffer stock program that succeed in reducing the
amplitude of the prices fluctuations does not necessarily reduces
instability in producers revenue