Inflation
Introduction
Inflation is used to describe a sustained increase in the general price level for services and goods. When inflation increases, every dollar that an individual owns buys a lesser percentage or proportion of a service or good. In most cases, inflation is caused by an imbalance between supply and demand of money, changes in distribution and production cost, or when the level of tax imposed on products and services is increased. In times when a country’s economyexperiences inflation, the value of its currency reduces. This has a negative effect on the quantity of goods and services demanded because each unit of currency is able to purchase fewer goods and services. Inflation yields the worst impact on potential consumers because it becomes extremely difficult for them to access or buy basic commodities required for survival. To enhance their ability in purchasing basic commodities, consumers seek for high-income increase from their respective employers (Hall, 2009).
Regardless of the negative consequences associated with inflation, a moderate or medium inflation level characterizes a favorable economy. In fact, an inflation rate of between 2% and 3% is termed as very useful to a country’s economy. This is because it encourages people to increase their level of purchase and at the same time increases the level of borrowing in a country due to the low interest rates on borrowed finances. Encouraging people to borrow money at lower interest rates is a
The problem of inflation increases the price of goods, which is obviously an increase in the
1. What is inflation? Inflation is an increase in prices for goods and services (What is Inflation?).
The United States inflation rates are a problem, if the government were to control them then the United States would flourish from a “B+” economy to a “A” economy. In the United States (September, 2015) consumer prices went up 1.5%,
The use of inflation determines the gain of benefits that will be put into place. An
In economics, with the inflation is a rise in the actual general level of prices of goods and services in an economy from over a period of time. When the general price level rise, such as each of the units currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power4 per unit of money. This therefore means that with the loss of real value in the medium of exchange and unit of account within the given and actual economy. With a chief measure for example and the price of inflation is within the given inflation rate, the annualised percentage change within a general price index over time in which is normally the consumer price index.
Conflict can occur between economic growth and inflation which in turn leads to conflict between unemployment and inflation. When an economy grows too quickly pressure on inflation rates increase. Australia’s current inflation rate is 1.3% (Economy Snapshot RBA 2016) The current acceptable rate of inflation nationally is between 1% to 3%. Inflation is defined as the sustained rise in the general level of prices in a market. For prices to be stable we should aim for 0% inflation rate. Introducing a fluid monetary policy which concentrates on identifying the fundamental causes of inflation rate rises in an economy, will assist in keeping inflation under control. For instance, if there were to be an excessive increase in demand for goods and services, demand being the primary factor for a rise in inflation, on a government level it should say to us, we need to identify the causes and commence action as quickly as possible to decrease the level of demand to ensure stability of the inflation
The relationship between inflation and unemployment is a topic, which has been debated by economists for decades. It is this debate that has made the opinions about it evolve. In this essay, the controversial topic will be discussed by viewing different economists’ opinions on that according to time sequencing.
Monetary policy, ‘The government’s policy relating to the money supply, bank interest rates, and borrowing’ (Collin: 130), is another tool available to the government to control inflation. Figure 4 shows, that by increasing the interest rate (r), from r1 to r2, the supply of money (ms) is reduced from Q1
Higher Wages and Higher Prices Inflation involves changes in both prices and wages, and can be initially caused by either. Therefore, in this essay I will look at two cases of inflation, one, which is caused by a change in aggregate demand, and one, which is caused by a change in aggregate supply. Both of these will have relation to prices and wages. I will then examine the fiscal and monetary policy responses available to government in either case.
* Adjustment on wages - It is argued a moderate rate of inflation makes it easier to adjust relative wages. If average wages are rising due to moderate inflation, it is easier to increase the wages of productive workers while wages of unproductive workers can be kept frozen – which is effectively a real wage cut. If we had zero inflation, we could end up with more real wage unemployment, with firms unable to cut wages to attract workers.
Inflation is a sustained increase in the general level of prices for goods and services
Disadvantages of inflation include high inflation rates that can cause hesitation and mistakes leading to less investment. It is discussed that countries with higher inflation, have lower rates of investment and economic growth. The higher the inflation the lower world-wide competitiveness. Another disadvantage is menu costs and the costs of changing price lists, stabile wage growth and declining incomes. Most importantly it can dcreas the real value of savings, which may affect older people who live on savings. However, it does depend on whether interest rates are higher than the inflation rate.
This clearly states that inflation directly impacts consumer buying habits, during high inflation people are more interested in buying staple products necessary for their survival or switch to cost effective alternatives. Buying of expensive products rely solely on sales and cash discounts. Entertainment spending and vacations also reduces during this period. People just hold on to their wallets.
Inflation is blazing subject that delays the economic development of the country. It is becoming extra hectic to economists, politicians and even people also. Factors on both demand and supply effect the inflation. So the stabilization strategies ought to consequently focus on both demand manipulation as well as