The Inflation Assumption....

It is often said that the assumptions under which the economic-theories have been said to be true are different from the real-World situation which restricts the ability to forecast the future and devise appropriate measures to achieve price-stability and full-employment and full-growth. However, full employment constrains output and is responsible for the former and higher interest rate, after which prices start increasing because production could not be increased in the short-run and labour demand higher wages because of low supply of labour and also due to inflation and lower real wages, scarcity increases the price of labour which gets transmitted in other cost and prices and the central bank tightens money-supply and increases the interest rate. At one place inflation goes up and at the other, the central-bank would also increase the prices by increasing the borrowing cost which further restricts supply and increase the prices. It is a common assumption or belief that after full-employment more money-supply from either monetary or fiscal policy would only increase prices without any effect on the real economy and employment, full-employment, higher money-supply and lower interest rate would increase overheating and the economy would lose competitiveness which the central bank would try to control by increasing interest rates and tightening, which again lowers competitiveness by increasing the borrowing cost which might not be the best way to increase supply, but they try to control demand by increasing unemployment which also decreases supply which is likely to increase the prices, instead of containing them. Nonetheless, depreciation or external devaluation might help increase exports, but, at a time when labour is scarce increase in demand would further lead to higher wages and costs which would negatively affect the competitiveness of the economy and the appropriate lever would be to control demand by increasing the exchange rate, however imports would help achieve price-stability after full-employment. Notwithstanding, there is an alternative view proposed by the Neo-Classicals or Freshwater economists that higher money supply might also decrease interest rate and increase supply (and probably lower prices) and Keynes view about capital in the long-run also point to lower long-run interest rate opposite of higher long-run rates in the real-World, long-run rates are generally higher than the short-run rates because of inflation and inflation expectations. People generally assume inflation in the long-run because the economists had assumed higher population growth rate which would drive-up prices, but on the contrary the real time shows that population growth rate has gone down and supply has increased with the lower borrowing cost, the natural effective real rate of interest has come down from its long-run trajectory…