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Understanding Inflation and Its Effects

Inflation is defined as a general rise in the prices of goods and services in an economy over time, which results in a loss of purchasing power of that currency. It can be caused by an excessive growth in the money supply. Moderate inflation may be attributed to changes in demand or supply, while sustained high inflation is caused when money supply grows faster than economic productivity. Central banks aim to keep inflation low by establishing monetary policies that control the money supply through interest rates and other mechanisms.

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Varun Talreja
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12 views1 page

Understanding Inflation and Its Effects

Inflation is defined as a general rise in the prices of goods and services in an economy over time, which results in a loss of purchasing power of that currency. It can be caused by an excessive growth in the money supply. Moderate inflation may be attributed to changes in demand or supply, while sustained high inflation is caused when money supply grows faster than economic productivity. Central banks aim to keep inflation low by establishing monetary policies that control the money supply through interest rates and other mechanisms.

Uploaded by

Varun Talreja
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd

INFLATION

In economics, inflation is a rise in the general level of prices of goods and


services in an economy over a period of time. The term "inflation" once referred
to increases in the money supply (monetary inflation); however, economic
debates about the relationship between money supply and price levels have led
to its primary use today in describing price inflation. Inflation can also be
described as a decline in the real value of money—a loss of purchasing power in
the medium of exchange which is also the monetary unit of account. When the
general price level rises, each unit of currency buys fewer goods and services. A
chief measure of price inflation is the inflation rate, which is the percentage
change in a price index over time.
Inflation can cause adverse effects on the economy. For example, uncertainty
about future inflation may discourage investment and saving. Fixed nominal
payments unadjusted for inflation in the monetary medium of exchange as a
result of the implementation of the Historical Cost Accounting model will widen
the real salary gap between those with fixed payments for constant real value
salaries and those with inflation-adjusted payments for constant real value
salaries. High inflation may lead to shortages of goods as consumers begin 
hoarding them out of concern their prices will increase in the future.
Economists generally agree that high rates of inflation and hyperinflation are
caused by an excessive growth of the money supply. Views on which factors
determine moderate rates of inflation are more varied. Low or moderate
inflation may be attributed to fluctuations in real demand for goods and services,
or changes in available supplies such as during scarcities, as well as to growth in
the money supply. The consensus view is that a sustained period of inflation is
caused when money supply increases faster than the growth in productivity in
the economy. "Inflation is always and everywhere a monetary phenomenon."
Inflation has no effect on the real value of non-monetary items. The "purchasing
power of non monetary items does not change in spite of variation in national
currency value."

The task of keeping the rate of inflation low is usually given to 
monetary authorities who establish monetary policy. Generally today these
monetary authorities are the central banks that control the size of the money
supply through the setting of interest rates, through open market operations,
and through the setting of banking reserve requirements.

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