The Inflationary Process : Market-Clearing Approach
We come now to the third of our four objectives, the objective of price stability. This was defined in Chapter 1 in a negative way as absence of a persistent upward movement in some appropriate price index. Our ultimate aim in this chapter and the next two is to consider what steps the British authorities can take to promote price stability in this sense. Before we can do this, however, we must clearly have some explanation of how the persistent upward movements in the price level, which constitute absence of price stability, actually come about. One explanation of this phenomenon will be examined in the present chapter and an alternative explanation, which seems more satisfactory for the British economy, in the next. Both of these explanations are strictly short-run in character, i.e. they purport to account for a continuous upward movement in the chosen price index short period by short period (say, month by month or quarter by quarter) over a short reaction interval (say, two or three years), rather than, say, year by year over twenty years (see section 2.2).
KeywordsPrice Index Upward Movement Aggregate Demand Price Stability Initial Equilibrium
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