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According to the article, China’s inflation climbed at the fastest pace in nine months in October, at 1.9%. However, the inflation rate was still capped below the government’s targeted inflation rate of 3.0%. Some inflation is good for the economy as famous British economist John Maynard Keynes believed that some inflation was necessary to prevent the “Paradox of Thrift”. If consumer prices are allowed to fall consistently because the country is becoming too productive or suffering from recession, consumers tends to save more for rainy days. When consumers save more money, the bank will naturally have more funds. However, the bank will not sit idle and do nothing with the money so it will then lower loaning interest rate so as to attract new borrowers. When more people borrow, they will have more money to spend more on new equipments and services. This supports the circular flow model of economy as increase in current spending encourages future spending. The net effect of this paradox is to reduce aggregate demand, causing falling general price levels.   4.1 Impact of Inflation on China’s EconomyHowever, should inflation stay unchecked and keeps rising, people’s real income will decrease. As a result, their purchasing power will be eroded by inflation and they are unable to buy as many goods as before. Another risk of higher inflation is that it has a regressive effect on lower-income families and older people in society. This happens when prices for food and domestic utilities such as water and heating rises as a rapid rate. If interest rates on savings accounts are lower than the rate of inflation, then people who rely on interest from their savings will be poorer. Inflation will have an effect on business competitiveness as well. If China has a much higher rate of inflation than other countries for a considerable period of time, this will make its imports less price competitive in world markets. High and volatile inflation is also not good for business confidence partly because businessmen cannot be sure of what their costs and prices are likely to be. This uncertainty may lead to a lower level of capital investment spending. 4.2 Type and Cause of InflationThe producer price inflation held steady at 6.9% in October. Due to the anti-pollution campaign, it increased commodity prices, which results in core inflation. This type of inflation is known as cost-push inflation as prices have been pushed up by an increase in commodity prices which is a factor of production. This will result in the increase in the cost of production. This will lead to cost-push inflation. The increases in the cost of production came from the anti-pollution campaign which increased commodity prices. Firmer producer prices for China are positive signs for China’s economy as it can boost profits and lower borrowing costs. Furthermore, the fact that food prices has become steadier and less fluctuating, it results in a steadier producer price inflation. This tends to be the cause of the demand for foods dropping and the producers then lowers food prices to reduce the loss of customers, making sure the customers still buy their food. Since the drop-in food prices has been lesser gradually, it means that the producers are slowly gaining back the demand in their food when compared to previous months. In addition, when there is a lowered decrease in producer price inflation, the consumer prices will slowly increase as they will spend more money on food.Due to an increase in China’s GDP, it also leads to an increase in real wages for most of China’s population. As a result, this leads to more spending from the populace on goods and services. Thus, sellers are unable to meet such an increase in demand, they respond by raising the prices of their goods. This is what we call demand-pull inflation. An example of this will be the increase in meat consumption in China. Between 2003 and 2013, the meat consumption in China jumped by nearly 25%. As farmers are unable to meet this demand for their livestock, they have raised prices. This is one example of demand-pull inflation affecting China currently. 4.3 Measures that can be taken by the governmentOne of the measures that can be taken by the government to control inflation is Monetary Measures. The government of a country takes several measures and formulates policies to control economic activities. Monetary policy is one of the most commonly used measures taken by the government to control inflation. Such policies involve a rise in bank rate, which the commercial bank gets a discount on loans and advances by the central bank. The increase in the bank rate results in the rise of rate of interest on loans for the public. This leads to the reduction in total spending of individuals as individuals now prefer to save money. One of the reasons the total spending is reduced is because the borrowing of money is costlier and more expensive for the general public resulting in reduced spending by the public. This would then reduce money supply in the market which in turn, controls inflation.

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