Anett Balázs
Mr.Polis
Economics IB2 HL
Inflation in Latvia: Causes, Consequences and the Governmental Response
Inflation is defined as a persistent increase in the average price level in the economy, usually measured through the calculation of a consumer price index.
Causes of inflation in Latvia
• Exchange rate Developments: “Latvia has a fixed exchange rate, with the currency pegged to the Euro, and the government does not want this to change. If this nominal rate of exchange stays fixed (at one Euro for 0.7 Lats), then the only way to lower the value of the currency internationally is to do so in “real terms.” This means pushing wages and prices down.”
• “Changes in administrative prices and widespread expectations of higher prices due to EU accession or an unfavorable exchange rate developments. (Lat is pegged to the Euro). Result: overheating in the labor market
• Rise in production costs, which leads to an increase in the price of the final
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