The Effect Of Inflation On The Economy

The term `inflation' defines a situation in which prices are rising and the value of money is falling. The cause of inflation is due to too much money in the economy ben printed and the high rise in demand. too few goods. An inflationary spiral tends to set in. Increasing prices produce a demand for higher wages: higher wages mean that goods cost more to produce: prices must go up again to pay for the wage increases.

1. What is inflation? Inflation is an increase in prices for goods and services (What is Inflation?).

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.

When is the last time we experienced deflation (prices actually dropped- you will have to go back a few decades)?

Inflation can be bad for the economy. Inflation happen when there is a bigger money suppy than there are goods and services. A shortage in goods and services leads to there prices going up. In the text "Brief Principles of Macroeconmics" author Gregory Mankiw states that "some economists argue that the costs of moderate inflation are not nearly as large as the public believes"(Mankiw Chapter Intro). Why are people more afraid of inflation than deflation? It makes no since to me. A moderate increase in prices have been proven over time to improve the economic stimuli.

A lot of literatures have already studied about the inflation and inflation prediction and in this paper literature review will be discussed from the theoretical aspect and empirical aspect. The researches of the inflation, which are studied, by a lot of scholars in the field of economics have been conducted for a long time especially during the 1970s and it is the heyday when people would like to pay more attention to research the inflation. The inflation has become a hot topic among the economic life and social life since 1987. However, no matter whether it is in the western economic field or in the Chinese economic field, people have different definitions on the inflation and so far there is no unified opinion and conclusion can be accepted generally by everyone. For example, Wyplosz and Burda (1997), Blanchard (2000), and Barro (1997) define that inflation is a sustained rising in the overall price level of products and services in an economy throughout the time period. By contrast, Zha and Zhong (2016) define that inflation is considerable as the mechanism to improve economic growth. In general, the common definition of the inflation is that the inflation is a continuous rising process in the aspect of price. In other words, the value of the currency decreases continually.

The debate about the relationship between inflation and unemployment is mainly based on the famous “Phillips Curve”. This curve was first discovered by a New Zealand born economist called Allan William Phillips. In 1958, A. W. Phillips published an article “The relationship between unemployment and the rate of change of money wages in the United Kingdom, 1861-1957”, in which he showed a negative correlation between inflation and unemployment (Phillips 1958). When the unemployment rate is low, the inflation rate tends to be high, and when unemployment is high, the inflation rate tends to be low, even to be negative.

By saying that this country has a high rate of inflation, that means people who live in this country are sad. Inflation has many definitions, but most of these definitions are related to one concept which is inflation is a general increase in prices and fall in the purchasing value of money. There is no doubt about that inflation is an important key concept in economics. As we know that there is something called deflation which is the opposite meaning of inflation. In this paper, I will write about inflation in general, the causes and effects of inflation, I will bring some countries in order to compare them, and I will mention some strategies which would help us in case we have a high rate of inflation. Most of the people are worry from having an inflation, and this is a true feeling. However, inflation could be a good thing for the economics, if it is a low rate. In fact, inflation in the whole world has been increasing, so the prices have been increasing and the value of money has been decreasing. For instance, according to Investopedia website, “During World War II, you could buy a loaf of bread for $0.15, a new car for less than $1,000 and an average house for around $5,000. In the twenty-first century, bread, cars, houses and just about everything else cost more. A lot more. Clearly, we 've experienced a significant amount of inflation over the last 60 years.” Investopedia staff said. On the other hand, throughout the history, it is something rare when a country has

Inflation is a sustained increase in the general level of prices for goods and services

Hyperinflation, as the word suggests, is a situation where inflation is excessively high. This phenomenon has many negative consequences in an economy. Throughout history, there have been numerous cases of hyperinflation that have had negative repercussions in the economy of these countries and the international market. Among these, countries with high inflation rates often experience bad economic performance (Fisher 877). In actuality, Venezuela has the highest inflation rate in the world. Due to various political and economic problems, this South American country’s inflation rate for the year of 2015 was of 180.9% (Forero) which is extremely high compared to other countries. To put this in perspective, the Federal Reserve aims for an

There are different influences that cause inflation such as energy, food, commodities, and other goods and services. The entire economy is affected by rise of the cost of living. It also affects the cost of operating a business, borrowing money, mortgages, corporate and government bond yields, and every other aspect of the economy. There are several advantages of inflation in the economy. Some include moderate rates of inflation which allows prices to adjust. This is considered a sign of a healthy economy. With economic growth available we usually get a generous amount of inflation. Also moderate inflation rate reduces the actual value of debt. If there is a reduction, the real value of debt increase leads to a squeeze on usuable income.

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

For years now economist have been debating about inflation and unemployment whether it is possible to achieve both of this main macroeconomic goals , which is low inflation and low unemployment in the economy at the same time without harming the economy. In this case it remains one of the challenge that face most of developing countries that include Namibia, to sustain the low inflation and low unemployment rate. Philips curve was emerged in 1960 in United Kingdom, was named after A. W. Philips the founder of Philips curve. Philips curve suggested that there is inverse relationship between inflation and unemployment and there are three assumptions of Philips curve: the first one is that in the short run there is trade-off between unemployment and inflation. The second assumption is that aggregate supply can break the concept of Philips curve because it can cause the stagnation that is high unemployment and high inflation. And the final assumption is that in the long-run there is no significant trade-off between unemployment and inflation. The economist like (McConnell 16th edition) has best interest to identify their relationship; in the short run there is trade-off between unemployment and inflation. In this view different studies in different countries have found out

Inflation can influence economic performance throughout the monitory policy of the economy. The economic specialists argue, that inflation effect economic growth of nations by decreasing domestic and foreign saving, inefficiency and ineffectiveness of resource allocation and declining balance of payment. Fischer and Modigliani (1980) suggested that there is a nonlinear and negative relationship between the rate of

Discuss the role of government policy in reducing unemployment and inflation. In your discussion make use of the diagrammatic representation of the macroeconomy developed in lectures in Term 2