Written Assignment -

2
Econ 345 – International Finance

Ali Asgar Abdul Udaipurwala

Student ID - 301449465
SUMMARY

The article talks about how both the Federal banks and the International Monetary Fund (IMF)
have been wrong in their inflation predictions as they have misinterpreted them since December
2020. The covid-19 pandemic and the Ukraine invasion have further debunked the inflation
predictions by the IMF of multiple large economies across the globe. Increasing spending and
lack of stringent monetary policies are the cited reasons for increasing inflation.

It held the pandemic responsible for rising inflation as the government started providing people
with support packages by increasing the money supply in the economy, which led to an increase
in the price levels of goods and services. The pandemic also contributed towards supply chain
issues, which led to a huge discrepancy in the demand and supply of products, further leading to
a shift in consumption.

In efforts to curb domestic inflation, the Feds have been increasing interest rates, which has led
to an appreciation of the dollar against other currencies. According to the article, this increases
consumer price inflation in foreign countries by about 1%. As the economies return to normal,
the wage packages have also been increasing because of reduced labour supply, which in
response has increased consumer spending and higher pricing of the products. More strict
monetary policy was required in order to control inflation and studying historical data is of no
use as we have not been in an interconnected, globalized pandemic before.

The article concludes by stating that the inflation expectations of America have somewhat been
on point or close to predictions, and the results of the EU and Britain have been disappointing in
the sense that they have performed opposite to the predictions.

Word count – 277 words

OPINION

The reason inflation in these following years has been so hard to curb is because of economic
policies followed by the western countries. For example, the USA, Canada and the EU provided
their populations with the economic stimulus package to get through the pandemic and pumped
money into the economy, increasing the money supply. As the money supply in the economy
increases, the interest rate reduces and the domestic currency becomes less attractive and
depreciated, which led to devastating effects for developed countries. For example, the USA is
the largest importer of products and if the dollar depreciates it costs more to purchase products,
leading to a higher internal cost of goods which gets passed on to consumers (the balance
money, 2022).

The governments did not realize is that in the long run, increased money supply will lead to
higher prices of products, leading to higher cost of living and rising inflation. Over the last
several years, we have witnessed several economic disasters like the Covid-19 pandemic, the
Ukraine invasion and the very recent reduction in oil supply by the OPEC countries. One after
another event has led to uncertainty amongst consumers, which leads to overshooting inflation
predictions for the coming time.

Analyzing the Ukraine invasion case closely, Russia is one of the largest suppliers of energy to
the European Union and acts as a backbone for financing the economic activities in one of the
most developed regions of the world. When Russia was sanctioned, it disrupted the exchange of
these resources to the EU, which increased the cost of living by around 11% and made the
production of goods more expensive in these countries (Statista, 2022). As the prices increased,
the governments rolled out stimuli and subsidies for the people, which increased spending but
failed to find a solution to curb inflation. To raise funds, countries like the U.K started borrowing
money to finance their expenditure amid the pandemic, the banking crisis and Brexit, which was
a disaster waiting to unfold.
Central banks should try cutting the money supply into the economy by increasing the interest
rates, which would prompt people to save money and invest in mutual funds or other assets,
providing them with returns. This would reduce the availability of money people have and bring
a change in their spending habits, ultimately bringing down the price of goods and services. For
example, if a consumer can no longer pay $100 for a product, the supplier has no option but to
decrease the price to sell the products off, providing consumers with the much-needed
bargaining power.

Word counter – 428 words

REFERENCES

 https://www.economist.com/finance-and-economics/2022/10/19/why-inflation-refuses-
to-go-away?
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 https://www.bankofcanada.ca/core-functions/monetary-policy/#:~:text=If%20inflation
%20is%20above%20target,the%20upward%20pressure%20on%20prices.

 https://www.statista.com/statistics/1201743/russian-gas-dependence-in-europe-by-
country/

 https://www.thebalancemoney.com/u-s-imports-and-exports-components-and-statistics-
3306270#:~:text=In%20fact%2C%20the%20U.S.%20is,services%20from%20abroad
%20in%202021.