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What are the Causes and Effects of Inflation?

What does Inflation mean and when does it occur?


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What is Inflation?

• When the prices of commodities and products of a certain nation constantly rises, inflation happens.
• It is derived from a certain percentage based on yearly figures of commodities and varied services.

Causes of Inflation

• lower supply of natural products such as oil and helium
• wars and natural calamities if the increase is for a short period of time only
• Monetarist theory called the quantity model
• Keynesian theories such as built-in inflation. cost-push and demand-pull

Quantity Model

Causes

• excessive economy income in the forms of mortgages, investment and cash which are not controlled in the proper manner.
• In monetarist economics, inflation is bound to happen and people shouldn’t be surprised about it.

How to Control It:

• getting a grip on the economy’s money

Built-In

Causes

• cost-pull due to the demand of laborers for higher rates
• demand-pull

Cost-Push

Causes

• monopoly
• increased tax rates
• manufacturers’ goal to get profit from their rising expenses
• shortages

Demand-Pull

Causes

• supply is lesser than demand due to the difference between exports and imports, investments, government and consumer spending.
• the rates of currency exchange can make exported goods cheaper while increasing the price of imported ones
• more income for buyers that they can easily dispose. This is a result of lower product taxes and an abrupt rise of the economy’s money.
• consumers also feel like spending more because of the healthy state of the economy
• manufacturers taking advantage of the great money of consumers


Effects of Inflation

• Because of this price increase, people are able to buy less products with the limited money that they have.

Controlling the Keynesian Theories

• controlling the level of wages
• facilitating the prices of goods
• bringing down certain mponopolies
Dec 3rd, 2012 at 2:30 AM
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