Cause and Effect of Inflation

Wisey By Wisey, 9th Jun 2015 | Follow this author | RSS Feed | Short URL http://nut.bz/1c-0rj7z/
Posted in Wikinut>Writing>Essays

Inflation happen universally, and eternally. Cause of inflation makes up the inflation type including cost-push inflation, profit-push inflation, many more. Fighting inflation is the measure of government, and so far the cause and effect of inflation is highly scrutinized so as to mitigate its side effect.

Inflation Casue and Effect

Inflation is an economic condition in which prices for consumer goods increase, and the value of money or purchasing power decrease. Inflation can originate from a very large variety of specific causes. These include currency inflation, budgetary inflation, cost-push inflation, demand-pull inflation, profit-push inflation, excess demand inflation, supply shortage inflation, speculation inflation, import in diced inflation, over-investment inflation, dis-saving inflation and lately petroleum inflation. We will discuss the currency inflation and the supply shortage inflation only in more detail.

The first and most important cause is currency inflation. For example, in order to finance a war or carry out social programmes, the government may spend more money than it has received through taxes and other revenue, this creating deficit. In order to offset this deficit, the Central Bank can simply expand the money supply by issuing more paper money to meet the debts of government. This increase in money supply will cause the value of dollar to automatically decrease.

The second cause of inflation is called supply shortage inflation. It occurs when the money supply increases faster than the supply of foods. If people have more money, they will run out to buy popular goods like televisions, computer, clothes, etc, for example, and a shortage will result. Industry will then produce more, at higher prices to satisfy demand. Furthermore, if people think that the prices of popular goods are going u, they will buy and even borrow money at high interest rates to pay for them.

Inflation means a decline in the internal value of money, which refers to the purchasing power of money within a country. During a period of inflation, those who have stocked goods or produce goods or own real estate normally benefit. Merchants and landowners thus normally gain during an inflation. Normally debtors also gain, as they see their real debts decline, as money, which is used to measure the size of their debt, depreciates in value. Government that is in debt will also find their debt burden reduced. Furthermore they will be able to collect more taxes, as modern taxes are generally structured in such a way as to yield more revenue as money income rises. However, the costs of running the public services are also likely to increase.

All of these causes can create inflationary problems that can affect the welfare of a nation. However, the impacts of inflation are considerably but there is so little benefit such as an interim result to decrease in employment rate.

Tags

Budgetary, Casue, Condition, Cost, Currency, Debt, Demand, Dollar, Economics, Economy, Effect, Finance, Government, Inflation, Inflation Type, Money, Money Supply, Paper, Price, Profit, Speculation, Supply, Tax, Value Of Money

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Graduate in 2004 in Management, and in 2006 in Finance, Wisey is pursuing his dream of entrepreneur where reading, listening, improvement, sharing, enjoying and practice are key to his life success...

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author avatar Davin
10th Jun 2015 (#)

Nice topic, Thank you for sharing.

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