Why do governments in less developed countries have difficulty in Essay

Why do governments in less developed countries have difficulty in restraining money supply growth in order to control inflation - Essay Example As explained, if in this particular situation, a country’s central bank opts for reduction in money supply in order to get rid of the inflation present in the economy, it will lower the gross domestic product even more and only strengthen the stagnation present in the economy even more. This situation, if continued as a long term policy, will lead to demand pull inflation in the long run. This is because on one hand the national output will be at a low level and on the other, due to a high population growth ate in these less developed economies, soon the aggregate demand will rise to a staggering level which, if tamed through a further reduction of money supply, will lead to a stagnation inflation spiral. (Chandavarkar, 1996, 9) Another problem courting these less developed economies is high rate of unemployment. Now a reduction in money supply, as explained above will discourage investment and thereby lower the level of output. As usual a lower level of output is also associated with a low level of employment. So this policy in course of time will make substantial addition to the pull of unemployed laborers of the less developed economy. The less developed economies have to bear with a certain level of inflation in order to experience growth and thereby ensure employment. Therefore, if a reduction in money supply is taken by the central bank as a policy to tame inflation in such economies it will only lead to long run aggravation of other economic maladies. (Lipsey and Harbury, 1992, 252) Furthermore, the less developed economies are typically characterized with black marketers who manage to bluff the government and thereby run a parallel economy. In such an economy, often inflation is caused by unethical storage of goods with a view to inflate the price artificially and hence reap the profit. In such cases