Top Answer
User Avatar
Wiki User
Answered 2015-05-06 15:44:09

A+= Money loses its value

What is Inflation . Inflation is a rise in the general price level and is reported in rates of change. Essentially what this means is that the value of your money is going down and it takes more money to buy things. Therefore a 4% inflation rate means that the price level for that given year has risen 4% from a certain measuring year (currently 1982 is used). The inflation rate is determined by finding the difference between price levels for the current year and previous given year. The answer is then divided by the given year and then multiplied by 100. To measure the price level, economists select a variety of goods and construct a price index such as the consumer price index (CPI). By using the CPI, which measures the price changes, the inflation rate can be calculated. This is done by dividing the CPI by the beginning price level and then multiplying the result by 100. Causes of Inflation There are several reasons as to why an economy can experience inflation. One explanation is the demand-pull theory, which states that all sectors in the economy try to buy more than the economy can produce. Shortages are then created and merchants lose business. To compensate, some merchants raise their prices. Others don't offer discounts or sales. In the end, the price level rises. A second explanation involves the deficit of the federal government. If the Federal Reserve System expands the money supply to keep the interest rate down, the federal deficit can contribute to inflation. If the debt is not monetized, some borrowers will be crowded out if interest rates rise. This results in the federal deficit having more of an impact on output and employment than on the price level. A third reason involves the cost-push theory which states that labor groups cause inflation. If a strong union wins a large wage contract, it forces producers to raise their prices in order to compensate for the increase in salaries they have to pay. The fourth explanation is the wage-price spiral which states that no single group is to blame for inflation. Higher prices force workers to ask for higher wages. If they get their way, then producers try to recover with higher prices. Basically, if either side tries to increase its position with a larger price hike, the rate of inflation continues to rise. Finally, another reason for inflation is excessive monetary growth. When any extra money is created, it will increase some group's buying power. When this money is spent, it will cause a demand-pull effect that drives up prices. For inflation to continue, the money supply must grow faster than the real GDP. Effects of Inflation The most immediate effects of inflation are the decreased purchasing power of the dollar and its depreciation. Depreciation is especially hard on retired people with fixed incomes because their money buys a little less each month. Those not on fixed incomes are more able to cope because they can simply increase their fees. A second destablizling effect is that inflation can cause consumers and investors to changer their speeding habits. When inflation occurs, people tend to spend less meaning that factories have to lay off workers because of a decline in orders. A third destabilizing effect of inflation is that some people choose to speculate heavily in an attempt to take advantage of the higher price level. Because some of the purchases are high-risk investments, spending is diverted from the normal channels and some structural unemployment may take place. Finally, inflation alters the distribution of income. Lenders are generally hurt more than borrowers during long inflationary periods which means that loans made earlier are repaid later in inflated dollars.

User Avatar

Your Answer


Still have questions?

Related Questions

What are the favourable effects of inflation?

favourable effects of inflation

What are the effects of inflation on real domestic product?

What are the effects of inflation on real domestic output?

The rate of inflation excluding the effects of food and energy prices is?

the core inflation rate

What is one problem with inflation?

One problem with inflation is redistribution. Inflation makes some people better off while it makes others worse off. The three things that cause redistribution are price effects, wealth effects, and income effects.

What is the rate of inflation excluding the effects of food and energy prices called?

the core inflation rate

Effects of economic dualism?

It results into inflation in the country

Effects of inflation in Pakistan economy?

inflation effcts in Pakistan

Effects of economic crisis?

there will be an increase in unemployment, inflation will be caused

What are the effects of inflation in the Philippines?

malay ko sa inyo

What are the effects of inflation on taxation in Pakistan?

you cant buy anything.

What are the effects of low real GDP?

core inflation rate

Questionnaire on effects of inflation on consumer purchasing power?

max white

What is the purpose of a cost-of-living adjustment?

to counter the effects of inflation

What were 3 effects to the postwar political problems?

* Unemployment * Inflation * Totalitarianism

Effects of inflation in Indian economy?

I don't think that there is any difference on how inflation effects the Indian economy as it effects any other economy in the world. Same thing happens to everyone. The government prints to much money which causes the prices to be raised and after a certain period of time it will all become next to worthless

What are the types of inflation?

On the basis of rate of Inflation, there are different types of Inflation. They are:Creeping Inflation.Walking or Trotting Inflation.Running inflation.Hyper or Galloping Inflation.Open Inflation.Suppressed Inflation.On the basis of rate of Inflation, there are different types of Inflation. They are:Creeping Inflation.Walking or Trotting Inflation.Running inflation.Hyper or Galloping Inflation.Open Inflation.Suppressed Inflation.

What are types of inflation?

Creeping inflationWalking inflationRunning inflationGalloping inflation

What is base effect in inflation?

When changes in the CPI in the base month have a considerable effect on twelve-month measured inflation, this is commonly referred to as a base effect. Base effects are therefore the contribution to changes in the annual rate of measured inflation from abnormal changes in the CPI in the base period.

What are the effects of inflation on distribution of income and on the balance of payment?

It leads to an arbitrary redistribution of income and difficulties in the baqlance of payment

What are some effects of the gold rush on San Francisco?

There was a inflation so the goods were scarce.It also became a boomtown.

What has the author C Eugene Steuerle written?

C. Eugene Steuerle has written: 'Taxes, loans and inflation' -- subject(s): Income tax, Capital levy, Loans, United Sates, Effect of inflation on, Effects of inflation on, United States 'Economic effects of health reform' -- subject(s): Health Insurance, Health care reform, Insurance, Health, Medical care, Medical policy, Public opinion

Is zero inflation and consistent rise in food prices?

Because peoples not interested in Agriculture much so automatically it effects

What are the solutions of inflation in India?

Inflation in India can be control by by rising the prices of products which auto maticly decreases the consumption of consumers or the other way is extensive advertisement for minimum utilisation resources.make people aware of what are the effects of inflation and how scarcity of resources affects there future and there children(most of the people work for whole life to make there future childrens secure) so if we emphsize on how inflation affects there future somehow we may control on inflation such as crude oil

Causes and effects of price rise in India and measures to overcome it?

The effect of inflation in India is an unbalanced relationship between the amount of money earned and the cost of regular goods. This relationship can be controlled by bank authorities by limiting inflation.

What is nominal quantity?

A nominal quantity is one that is represented in current dollars, that is, without inflation effect. A quantity that accounts for inflation effects is called a "real" quantity. For more information, please see the related link below.