Inflation and the economy essay
Walking Inflation: If the rate of annual price increase lies between 3 p. Deficit-Induced Inflation: The budget of the government reflects a deficit when expenditure exceeds revenue. Once the government curbs are lifted, the suppressed inflation becomes open inflation.
Given a situation of full employment, classicists maintained that a change in money supply brings about an equi-proportionate change in price level. Naturally, inflation results in a reduction in real purchasing power of fixed income earners.
What is inflation
Such credit expansion leads to a rise in price level. This enables people to hold excess cash balances. In the midst of this output reduction, artificial scarcity of any goods by traders and hoarders just simply ignite the situation. But, at the same time, firms are to be blamed also for the price rise since they simply raise prices to expand their profit margins. Ultimately lower inflation rate leads to positive impacts upon economic growth, creates a greater sense of certainty, leads to an expansion of exports and replaces imported substitutes with domestic products, thus improving the trade deficit. Words: , Paragraphs: 9, Pages: 4 Publication date: April 03, Sorry, but copying text is forbidden on this website! Given full employment, such increase in aggregate demand leads to an upward pressure in prices. Never does it happen. With anticipated inflation, people can build up their strategies to cope with inflation. In other words, inflation may be unanticipated when people fail to adjust completely. Further, during excessive price rise, there occurs an increase in unproductive investment in real estate, gold, jewellery, etc. Governmental expenditure is inflationary if the needed money is procured by the government by printing additional money. Profit tends to rise during inflation. As aggregate demand curve shifts to AD2, price level rises to OP2. Now, there is a leftward shift of aggregate supply curve to AS2.
High rate of inflation acts as a disincentive to long run economic growth. Again, there is a tendency on the part of the holders of black money to spend on conspicuous consumption goods. Spending of excess cash balances by them causes price level to rise.
Thus, it redistributes income and wealth. What is inflation and what causes it? Further, even if it is anticipated it cannot be perfect.
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