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nd other factors according to the last years have increased as well. This means that demand for the previous years has increased dramatically, and this makes up the Inflation pressure, thus pressuring the prices to go up once again due to the shortages.

There is also a difference in producing and demand, therefore this factors is infulencing the inflation rate increase. Latvian economy was experiencing a boom due to loand taking. Loaning increase and increased demand create the increasing rate of the inflation. If evaluate the total ammount of loans taken, then the effects on the economy of Latvia is drastical. This overheats the economy. The overheating of the economy is mainly based on The ?Loan Fever” , due to easy money avaliability. The improvement of the economical situation and not filled loan market, resulted into increasexd ammount of people risking and taking loans. And if we look on the consumer loans that were given to the regular inhabitants, then the situation is was even more dramatical, since people are looking at the future money flow, not at the current opportunities and possibilities, and usually they were very optimistic. If we commend on the ammount of loans given, and it’s influence on the inflation and economical stability, the prime minister of Latvia ?Ugis Zalitis” said, that due to the loans there is increase in the money flow, therefore the demand for some type of goods is increased and due to this we return to the increase in the prices, which once again resulted in the higher inflation rate.

Efforts to end inflation almost always seem to be associated with recession. The lost output associated with inflation reduction is what is referred to as the “costs” of stabilization.

Stabilization

Stabilization or disinflation may be costly for several reasons. For simplicity, we break these explanations into the two camps discussed below.

First, New Keynesians emphasize costs arising from aggregate demand policies in the presence of nominal rigidities, or inertia in wages and prices, which arise because of staggered or backward-looking contracts and/or menu costs.

Second, the New Classical School emphasizes the problems in making a promised stabilization credible. The credibility problem is made more difficult, it is argued, by the implementation of policies. Instead, the inflation may be reduced without much of a cost in terms of lost output if the government pursues an ambitious plan of attack centered on tightening domestic credit and eliminating the budget deficit.

Given the need for credibility, there is widespread belief that the longer the government waits to attack inflation, the more damage to the economy, and hence, the more costly will be the policies needed to stabilize the economy. Why, the, do government delay stabilization? One answer may be that policymakers are irrational, but this conclusion is less than satisfactory because it might explain any behavior.

Latvian government has introduced the anti inflation plan in the year 2007

The government anti inflation plan18 has five broad sets of measures. Three measures – budget policy, real estate taxation and measures to dampen the credit boom – are described as providing “for short-term and medium-term policy implementation”. The other measures aimed at the labor market, productivity, energy efficiency and i