Reference no: EM132600867

1. Read the paragraph given below and write down which type of inflation is the main cause of rising prices in developing Asia. Give justifications to support your answer.

Rising inflation has emerged as by far the biggest macroeconomic challenge confronting developing Asia from 2008 on wards and will remain a challenge in the upcoming years. In fact, inflation as measured by consumer price indices (CPI) has gathered momentum throughout these years. Higher inflation is engulfing virtually all of developing Asia, although the exact magnitude of the increase in inflation differs across countries and sub-regions. The benign paradigm of strong growth and subdued inflation seems to have been shattered. The obvious question to ask is; what has changed? One of the changes that have emerged in the mentioned years is the spike in international commodity prices, particularly food and oil prices. If higher food and oil prices are indeed what underlie Asia's inflation, the scope for anti-inflationary monetary tightening, which works by dampening aggregate demand, would come at a steep cost in terms of foregone growth impacts. Another change is the impressive economic growth in developing Asia over the past decade. This high growth with low inflation allowed monetary policy to be accommodation and may have lulled monetary authorities into complacency.