Is there too much money in the economy??

Posted: November 17, 2007 in Citizenship, Education, Information, Politics

The Government announced a whooping increase of K3 billion to the National Budget to around K8.4 billion. This is a record breaking budget ever since impendence and it brings a smile to all ministers and members of the Parliament.

Each district has been allocated K10 million which was raised from K1.5 million to K3 million earlier this month. The K10 million for each district seems too good to be true and each district now is preparing to use this money as the next year budget will also be K10 million if the current government stays on.

While PNG is smiling, I am screwing my face behind this computer as my economic senses are being put to test here. I welcome the budget so much…..yet somehow I feel there may be a problem that could be creeping in if our financial planners are not careful.

The problem I see is “Demand Pull Inflation”. Now let me try as much as possible to explain it in a layman’s term. Demand Pull Inflation refers to increase in Inflation due to an increase in demand in the economy. Because there is a lot of money pumped into the economy to be used in a short period of time, there will be a shortage of goods or services to meet the demand. Now because too much money is chasing so few goods, the price of that good will increase.

According to keynesian theory, the more firms will employ people, the more people are employed, and the higher aggregate demand will become. This greater demand will make firms employ more people in order to output more. Due to capacity constraints, this increase in output will eventually become so small that the price of the good will rise

Example: A bag of rice cost K3 at a local village store. Suddenly, 10 villagers who earns money front up to the shop to buy the rice for K3, but since there are only 5 packets of rice available, not all 10 will buy it. And since the shop owner wants to maximize his profit, he will raise the price to K5 to meet the demand.

This is commonly described as “too much money chasing too few goods”. More accurately, it should be described as involving “too much money spent chasing too few goods”, since only money that is spent on goods and services can cause inflation. This would not be expected to persist over time due to increases in supply, unless the economy is already at a full employment level.


Govt to announce K8.4b budget

THE 2008 Budget is a whopping K8.4 billion, K3 billion more than the previous budget and a record-breaking money plan since Independence.
The budget was supposed to have been handed down this afternoon but has been deferred to next week due to problems associated with the frequent power blackouts in the city, according to Secretary for Treasury Simon Tosali.
Mr Tosali told the Post-Courier yesterday the power blackouts had caused the computer systems some technical problems which had affected the figures and needed information technology people to correct the fault.
He said the system was being worked on and it was hoped to have the budget ready for next Tuesday.
On November 6, Mr Tosali took out a paid advertisement in the Post-Courier advising of the Budget lock-up to be held today at 10.30am. In the notice, he also said there were to be only two representatives from each organisation and that no phone calls would be allowed.
The unofficial budget figure was released by Minister for Foreign Affairs and Wabag MP Sam Abal in Wabag on Friday at the opening of the Bank South Pacific’s new building in that centre.
Mr Abal announced there would be a K8.4 billion budget. The Somare Government’s 2007 budget was about K5.4 billion.
The director of the Institute of National Affairs, Paul Barker said the real budget for 2007 was K5.4 billion but the temporary borrowings increased it to about K7.7 billion after the supplementary budgets were handed down.
Mr Barker said the same may have been said with this figure where the actual budget may be around K5 billion but the temporary borrowings like last year may have increased the figure to that amount



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