As inflation is directly proportional with the aggregate demand in an economy and also the money supply, governments encourage a certain rate of inflation to prevail in an economy for gradual growth (Edwards, 1984).
Prior to setting up of a business or preparing the annual financial budget for the economy, inflation is always taken into account. Measures are taken to control inflation so as to leave room for investment, global competitiveness and local demand in the economy. Therefore, attaining price stability through controlled inflation has always been one of the major concerns for all economies (Hart, 2010).
Inflation is caused through various factors. It is however difficult to conclude as to what factor has precisely led to inflation and by how much. The forces of demand and supply and other factors concurrently result into inflation and the government has the tools of fiscal and monetary policy to control these factors simultaneously. The major causes of inflation can be because of a demand shocks, supply shocks, money supply and exchange rates, and future expectations (Mishkin, 1984):
Inflation is directly proportional to the aggregate demand in an economy. This is because, when the economy is at its growth stage, there are more employment opportunities. As more people are able to work, households’ incomes rise giving them more purchasing power. This causes a rise in the aggregate demand. As the aggregate demand curve moves to the left, the producers also have to increase their supply to exploit this rise in demand. As they increase their production/extend their supply, their costs of production increase which results into an increase in the price level. This Demand-pull inflation can be so intense that it can also cause a Stagflation where an economy reaches at a stagnant growth with high unemployment and high inflation rates. (Martin, 1985).
In contrast with Demand-Pull Inflation, Cost-Push Inflation is ...
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In the same way, it will provide an analysis into some of the effects of inflation while focusing on the different types of inflation arising from different economic situations. Introduction Inflation is described to be a rate in which the overall price of goods and services is increasing while the purchasing power decreases in an economy (Nicholson 57).
In effect, inflation is the loss or the diminishing of value of money in a given economy (Blanchard 45). In plain language, inflation is the instance where goods and services get expensive or the phenomena where people complain that the price of commodities is rising.
In common usage inflation refers to the state of the economy when the money supply is much higher than the physical quantity of goods available in the economy. According to Keynes, inflation refers to that phase of rise in the general price level after the output in the economy grows beyond the full employment level of output (Frisch, 1983).
The effects of inflation can affect an economy in positive and negative ways or both positively and negatively simultaneously because it affects the differently. In many circumstances, there are different explanations that could be given to the rise of inflation in an economy and which could explain the reasons why a currency can lose its purchasing power as compared to different circumstance in market.
Businesses are reluctant to make investments during periods of volatile inflation. Countries suffer from a tax rate that is based on pre-inflationary periods that are less than the current value. It also causes exports to go down as prices go up resulting in a trading deficit.
In cases where demand increased tremendously and threatened to augment inflation rates and cause large balance of payments deficits-income, instead of monetary policy, was used as the instrument to keep
effect that it will now require more units of money for the same goods and services purchased or the number of goods and services purchased with the same amount of money is reduced. In effect, inflation is the loss or the diminishing of value of money in a given economy
This discussion concludes by outlining control measures necessary to manage inflation and the alternatives polices that can be taken by the government to manage inflation.
Inflation refers to increment of price levels in
Inflation refers to increment of price levels in general that is the rise in prices in not on individual commodities but in all areas over a period of time. It’s a change expressed in percentage and compared over
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