Artificial Boom

 

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Artificial Boom(by M.Ebrahim Sadeghian F.)

Many economies suffer from short term policies which are based on self interest of 4 year period government. 4 years is relatively a short time for constructive economic policies to be applied .  In countries where there two or three strong parties are competing for a votes, they will take on policies which are attractive to people's eyes, so that they can get elected for the next round. 
Many of these policies are really harmful in long run but are constructive in short term( ie. appear constructive).

overall it will do more harm than good. Economics policies must be used in interest of general public. But no system is perfect and in many governments policies are used for a party’s gain.

A common strategy is  the artificial boom policy. In this policy government uses monetary and fiscal policies in order to cause an artificial boom.By pumping money into the economy through cutting taxes short and dropping interest rates;government increase people’s PPP(purchasing power parity)this will suddenly pull up the aggregate demand. In this policies change rates are usually abnormally big. In short time after the policies have taken place,great changes are felt by people. Prices go up, production goes up, employment goes up, people will start new businesses since loans are very cheap. It will seem like the economy is developing very fast. Unfortunately economic literracy of many societies are very low, and people see this as boom. While its only an artificial boom. This will cause people to trust the new party with their policy and government will gain their votes.

Aggreggate supply is very inelastic comparing to Aggregate demand, This sudden rise in demand ,will be followed by a sudden rise in inflation,  so usually governments  bring the economy to its normal state after a short while, but if they are not fast enough the ecoomy will be wrecked.  A sudden inflation in an economy can be more harmful than a slow crawling one. Since sudden rise in prices will trigger spiral inflation in an economy since people speculate.The reason is that when prices are rising slowy people don’t  really notice it, but when it rises fast, people will speculate and take measures. Many will buy a lot of goods in advance, so that they wont have to purchase when prices are higher later. This will again increase the aggregate demand further and cause more inflation. The labour union will ask for higher wages, and firms will increase the prices in order to pay the increased salaries of their labour. The inflation will become like a big stone rolling down a hill, it will keep gaining momentum and it will become so fast that stopping it would mean crushing some classes of the society in order to bring the stone to a halt.

New businesses that started due to cheap loans and high demands, will loose their businesses since the demand will drop due to high inflation which reduces people purchasing power. And government in order to take the inflation under control will probably increase the interest rates in order and increase taxes. This inflation rate will increase the price of the country’s export, Hence country’s demand will fall from foreign countries if their demand is elastic. Many people will become unemployed as demands are very short during the inflation period.

So both unemployment and inflation go up, and when both are high bringing either one becomes very hard and in some cases impossible. Since both are near their threshholds( threshhold of people). Decreasing one will cause increase in the other. And if either one pass their threshholds, there will be riots and political problems.An artifical boom policy if not brought under control immediately will be very harmful to an economy.

All in all, in economy after every boom there is a recession, in this case after every artificial boom there is a real recession.

In 1923 Britian took measures to prevent this situation. By creating restrictions for short term policies like fiscal policies or monetary policies.  They  restricted fiscal policies, by creating limits where by a ruling government has to keep in a certain range of government revenue ,interest rate ratio. This restricted the governments in using short term policies, hence ruling government will be forced to used more effective policies

 

 

M.Ebrahim Sadeghian F.