What is the current level of inflation in the UK?

Economics A Level - Inflation?

• hi.. i have this question, which im not sure of its answer. i got myself all confused. here it is : 'discuss if Fiscal policy is best way to reduce inflation' i was thinking that i can compare it with Monetary Policy... but from Fiscal P., i can only use Budget Surplus which is reducing gov. expenditure, increasing tax, which causes lower Agg. Demand which leads to higher Savings. While in Monetary Policy, a higher interest rate would cause lower investment (which will reduce inflation) but wouldnt it be causing demand from foreign country to invest as it has higher interest rates to offer, which will indirectly cause C/A deficit as there would be outflow of Dividen, profit and Investment?? but if this happens... would it cause inflation/? lol. im soooo confused

• Answer:

  Your paragraph about fiscal policy is correct, except at the end you should draw the conclusion that lower aggregate demand leads to lower price levels. This is important: if aggregate supply is relatively inelastic (the curve is relatively vertical) near the equilibrium point, then fiscal policy could be the best way to reduce inflation, in the long term. This situation would represent a case where the economy is at or near maxiumum output, and is overheating due to high demand. This is especially true if the government is running budget deficits, which are especially inflationary in times of full employment. I think you got a little too wound up in the monetary policy thinking. Think about the fundamentals...higher interest rates mean that capital is more scarce, which will drive down the use of capital. Think of interest rates as the equilibrium price point in the market for capital. The supply curve of capital includes both domestic captial and foreign capital. Draw a supply/demand graph, and shift the supply curve up and to the left to reflect tightening of monetary policy. The new equilibrium point has a higher price and lower quantity, reflecting higher interest rates and less quantity of capital supplied.